Beneficiary Designations

When’s the last time you checked your IRA’s beneficiary designation?

If you’re like most people, it’s been a while. Many people name a beneficiary when they open a retirement account. Most NEVER revisit their choices. Due to the SECURE ACT the beneficiary designation of your retirement accounts are more important than ever.

But not reviewing your beneficiary designations on a regular basis is a huge mistake. And it’s not just about you. Outdated designations may cost your loved ones a lot of time, money, and frustration.


Because life changes! And when it does, updating your beneficiary designation may make sense, too. (Plot twist: the best choice isn’t always the obvious one.) 

So, let’s talk about five things to consider when designating your beneficiary.

1. One form to rule them all

Believe it or not, your beneficiary designation form overrides your will. If you think naming an IRA beneficiary in your will is enough — think again! 

A missing beneficiary designation form means your IRA assets will be paid to your estate upon your death. This leads to the dreaded probate process … which can be lengthy, frustrating, and expensive for your heirs. Do you really want them to deal with an extra headache at an already-difficult time? I would guess not. So, take the time to complete your beneficiary designation form. 

2) Ch-ch-ch-changes 

Review and update your beneficiary designation whenever a major life change happens. Death of a beneficiary, divorce (yours or theirs), and other life events may prompt you to rethink your original choices. 

Example: let’s say you divorce and later remarry. If you don’t update your beneficiary designation, your ex may receive part (or all) of your IRA assets. Awkward! 

3) Happy spouse … happy house

In some states, IRA owners need written permission from their other halves to name a non-spouse beneficiary. In most cases, it’s usually wise to name your spouse as beneficiary — and not just to keep the peace at home.

As your primary beneficiary, your spouse may take ownership of your IRA with the same rights you had. If you name a non-spouse, they may have to withdraw the assets within a certain timeframe. This means less tax-deferred earnings growth and possible unwanted tax consequences for them.

4) Won’t someone think of the children?!?

Naming your children as primary beneficiaries may make sense if your spouse is financially secure. But note that children must take distributions from the IRA right away after inheriting it, and under the new SECURE ACT must be distributed over 10 years. This can affect their taxes. 

Or, name your spouse as primary beneficiary and your children as contingent beneficiaries. This option gives more flexibility with taxes and timing of distributions.

5) A fine line between trust and control

Worried about the fiscal (ir)responsibility of your heirs? You may want to name a trust as your IRA beneficiary.

The downside is greater tax liability for you. Trusts can also be complex, so it’s best to consult an attorney on setting one up. 

There’s no single best answer for how to choose your IRA beneficiary. You need to consider your goals and unique circumstances. The team at Independence Wealth can help you make this important choice. Give us a call today.

Secure Act

With a Happy New Year come new tax laws… Well, in 2020 they did!

You have probably seen the news that the SECURE Act (which stands for Setting Every Community Up for Retirement Enhancement) was signed into law on December 20, 2019. The goal of the new law is to take steps towards solving the retirement crisis in the United States.

Some of the new law’s provisions may affect your retirement plan.

Here is what’s inside.

No more age limit for IRA contributions.

Under the old rules, any contributions to Individual Retirement Accounts (IRAs) were prohibited beyond age 70 ½. The new law removes that limitation. Under the SECURE Act, individuals of any age can contribute to IRA accounts, as long as they continue to receive “compensation” (earned income from wages, salary, or self-employment).

Bottom line: This is good news for those who want to work and contribute to retirement savings accounts.

Required Minimum Distributions delayed until age 72.

Required Minimum Distributions (or RMDs for short) is the amount of money that must be withdrawn from traditional, SEP, and SIMPLE IRA accounts when you reach a certain age. The old law placed that age at 70 ½, which made it confusing to understand and apply. The SECURE Act delays the start of RMDs until age 72.

Important note: This change only applies to individuals who turn 70 ½ in 2020 or later. So, if you turned 70 ½ on December 31, 2019, you will have to follow the old rules.

Bottom line: If you are already withdrawing more than the required minimum amount from your IRA, the new law likely won’t affect you. If you would prefer to delay the start of RMDs and qualify under the age rules, then the new law may create some tax planning opportunities for you.

No more “stretch IRA” (with a few exceptions)

Under the old rules, the non-spousal beneficiaries of an IRA could draw down the account (and pay related taxes) over their lifetime. This was known as a “stretch IRA”. Under the new law, the stretch IRA is gone. Non-spousal beneficiaries of an IRA must now draw down the account within 10 years of the death of the original account holder.

This rule comes with a few exceptions. If the beneficiary is disabled, chronically ill, or no more than 10 years younger than the original IRA owner, then lifetime distributions are still allowed. If the beneficiary is a minor, the 10-year rule doesn’t kick in until the child reaches 21 years old.

Bottom line: Check your listed beneficiaries, and talk to us about a Plan B for your IRA.

Greater access to retirement savings plans for part-time workers

The old rules gave part-time employees limited access to employer-sponsored retirement savings accounts. Under the new law, more part-time workers may become eligible to participate in retirement savings plans. This applies to employees who either work 1,000+ hours during one year, or have 3 consecutive years with 500 hours of service.

One notable exception to this rule: it does not apply to employees who are a part of a collective bargaining agreement.

Bottom line: If you are a part-time employee, you may be eligible to participate in a retirement plan at work.

What does all of this mean for your retirement?

The answer is, as always, “It depends”. There are some things you may consider doing on your own (like checking beneficiaries on your Employee Sponsored Retirement Account and inquiring with your employer about your eligibility for new benefits).

If you have any questions about how the new SECURE Act will affect your retirement, give us a call.

Happy New Year,
Eric Nelson

Retirement planning is complicated

Retirement planning is complicated. I’m sure you already knew that.  Your security in retirement depends on a lot of moving parts. And you have to make predictions on how those moving parts will behave in the future. For example:

  • How much you’ll spend
  • How much income you’ll receive
  • How much your portfolio will grow
  • Your health status
  • Your longevity

…There’s no way to know with 100% certainty what those answers will be five, 10, or 20 years down the road.  That’s part of what makes planning for retirement so complex.

Also, there’s dozens of retirement tools to choose from.  Learning how you can maximize these tools can be overwhelming.  Tools such as:

  • 401K
  • 403 (b) 
  • IRA
  • Roths
  • Social Security
  • Pensions
  • Medicare 
  • And on and on and on…

With proper planning, you can make reasonable predictions to prepare for possible outcomes. And you can increase the chances that your plans will produce the ideal retirement.  But you have to know the best practices for building a solid plan.

The best way to get started is to maximize each tool in your retirement arsenal.

Here’s a few questions to see if you’re getting the most out of your retirement planning: 

Are you…

  • maximizing your social security benefits?
  • optimizing your investments for your situation?
  • using annuities to their full potential?
  • insured with adequate coverage? 
  • using a realistic plan for taking income from your portfolio?
  • minimizing taxes?

These are just a few considerations that need to be addressed.  There’s more, but you get the idea.

Often it’s best to tackle one area at a time (while keeping the big picture in mind). 

I know it’s easy to get overwhelmed.  There’s so much to consider… many people just throw up their hands and hope for the best.  That’s not a strategy that I recommend. It doesn’t usually turn out well.

Avoid the healthcare cost roller-coaster with an HSA

Fidelity Investments has some tough news for soon-to-be retirees.

A recent study showed that healthcare expenses for a healthy 65-year old couple over the course of their retirement can get to $280,000 or even higher. 

That’s a scary number. It’s not surprising that healthcare costs are one of the top financial concerns for both pre-retirees and retirees.

What if I told you that there might be a tool to help you avoid your personal healthcare savings crisis?

No, it isn’t a magic wand. But there is an account that’s custom-made to help you save money to cover medical expenses – and save money on taxes in the process.

Yes, I am talking about the Health Savings Account (or the HSA for short).  When used strategically over time, this can become your secret weapon.  

Do you have an HSA?

If you have a high-deductible health plan with a deductible of at least $1,350 if you’re single (or $2,700 for families), then you are eligible to open an HSA. Many employers offer it as a benefit. If your company doesn’t, you can open one yourself. 

Do you use an HSA?

I hope so! Between restrictive use rules and relatively low contribution maximums, Health Savings Accounts are under-appreciated and underused.  Believe it or not, only one out of four HSA-eligible employees actually use it!  

HSAs are also easy to confuse with their close cousin FSAs (or the Flexible Spending Accounts). An FSA can’t be used to accumulate savings, and people worry about losing the account balance if they happen to not need it during any given year. HSAs don’t work the same way, but if you don’t understand the difference you can’t take advantage of them.  

How much can you contribute?

This year, the HSA contribution limit is $3,500 for individuals and $7,000 for families. If you’re 55 or older, you may contribute an additional $1,000 per year.  And, if your employer offers an HSA match, your account balance can grow even faster. If you are enrolled in Medicare Part A or Part B, you can’t contribute to an HSA. 

Why should you consider using an HSA?

There are three reasons.

  • One, any contributions you make are tax-free. HSAs are like 401(k) plans in that any money you put in will lower your taxable income. 
  • Two, your account will grow tax-free. Unlike a “use it or lose it” healthcare Flexible Spending Account, the balance in your HSA will roll over from each year to the next. 
  • Three, any withdrawals you take for qualified medical expenses are tax-free. That includes deductibles, dental and vision care, prescriptions, co-pays, and more. If you use this money for a non-qualified reason, the withdrawal will be taxed as income and you will have to pay a 20% penalty. 

What happens when you retire?

Once you enroll in Medicare, you can’t contribute to your HSA any more. But you can use the money you’ve saved to pay for any out-of-pocket healthcare expenses (like copays, deductibles, hearing aids, nursing home care, in-home care, and more). 

There is one other hidden benefit, and the reason why some financial planners refer to HSAs as “a secret IRA”. After you turn 65, the 20% penalty on non-qualified withdrawals goes away. So, you will only pay income taxes on any non-medical withdrawals. 

If you worry about the cost of healthcare in retirement, consider an HSA. If you’re not sure whether an HSA is right for you, our team at Independence Wealth can help you figure it out.

Is Social Security enough for retirement?

There’s no nice way to say it. But many baby boomers are going to have a tough time in retirement.  If they can retire at all.

Why do I say that?

I just read a few statistics about baby boomers and their retirement.  And it wasn’t good news.

Here’s some of what I found:

78% of people age 50+ are behind on saving for retirement.

And on top of that… 24% of baby boomers have no retirement savings at all. 

Many pre-retirees and retirees have no savings.  Because they’re banking on Social Security alone to fund their retirement. 

Let me tell you why that’s a bad idea… 

There’s this little thing called inflation.  And it will erode your retirement funds quicker than almost anything.  Yes, you will get cost of living adjustments (COLA) for Social Security.  But it may not be enough to offset the increases in cost of living from inflation.

More specifically… your health care costs. 

Each year Social Security payments may get a cost of living (COLA) adjustment.  This is to keep up with rising prices (inflation). 

The government bases that COLA adjustment on the consumer price index.  It’s a basket that reflects overall price increases. 

The problem is, health care costs are rising faster than overall prices.

Many retirees underestimate how much health care costs will impact their Social Security. 

According to a Nationwide study, retirees could spend up to 64% of their social security benefit on health care costs alone. 

That doesn’t leave much left over.   It will be hard to live on 36% of your Social Security benefit… even if you qualify for the maximum benefit.

You need to factor in health care costs when planning your retirement.  Costs have been increasing year after year… with no sign of slowing down.  But there are ways to ease the pain of health care cost increases. 

These can include..

  • Increasing savings to cover health care costs
  • Utilizing an Health Savings Account (HSA) to save money
  • Working longer into your retirement years

Planning your retirement can seem daunting.  You have so many options to consider. Health care costs are just one piece of the retirement puzzle.  But you can set yourself up so you don’t get blindsided by rising health care costs.

And if Social Security is your only plan for retirement… you should consider other options so you can live more comfortably.  There’s lots of ways to build your retirement savings. That way, you don’t rely solely on Social Security.

13 Common Financial Mistakes in Estate Planning

Death is an unfortunate reality of retirement.

But I’m sure you want to be fully prepared when the inevitable day comes.

You don’t want your friends and family picking up pieces of your life while they grieve.

If you don’t want to leave your family a mess to clean up… then a proper estate plan is essential for your retirement.

The unfortunate truth is that most people haphazardly plan for the finish line.

I often see people make mistakes that cause pain and frustration for their loved ones. Because they don’t know the rules or consult an expert… they subject their loved ones to years of probate court, time, and expenses.

Don’t make simple mistakes with your estate.

Here’s a list for you of common mistakes I see with estate planning. Make sure you’re not making these mistakes in your own life!

  • Assume that your will is going to take care of all the details
    Beneficiary designations (on IRA, 401K, brokerage..etc.) trump what’s in your will. If you set up a trust, designate the trust as the beneficiary. Don’t use a person’s name… even if they are due to inherit the money.
  • Give your heirs an avoidable tax bill
    If you don’t designate beneficiaries on your IRA… your heirs won’t maintain tax-advantaged growth over their lifetimes (via a stretch IRA). Without a beneficiary, your IRA money will go through probate. And your family (excluding spouses) will be required to withdraw the money within five years. This incurs an immediate tax bill. And it makes all subsequent earnings and capital gains subject to income taxes.
  • Trigger probate on life insurance proceeds
    If you name your estate as the beneficiary of your life insurance, it becomes subject to probate. Instead, name an individual or a trust as beneficiary for life insurance.
  • Forget to update forms when life happens
    Just as bad as failing to name a beneficiary… is having the wrong beneficiary. Beneficiaries can marry, divorce, come of age, or tick you off. That’s how exes and bitter sisters-in-law get rich.
  • Not having a Plan B
    If your primary beneficiary isn’t around to collect, and no secondary beneficiary is named… the court decides who gets your money.
    Be exact. You can name multiple primary and secondary beneficiaries.
    Don’t be afraid to spell out how you want your assets divided.
  • Name minor children as beneficiaries
    Until age 18 or 21 (depending on state laws), minors can inherit only limited amounts. Designate a financial guardian or set up a trust for a minor. Either of these need detailed directions on how to manage the windfall until the children are of age.
  • Disinherit kids from a first marriage
    Houses, bank accounts, and other assets held jointly go right to the co-owner. No matter what your will states. This can leave children from a previous marriage no rights to contest.
    You can prevent this. Use beneficiary designations on assets that carry no spousal or joint ownership constraints.
  • Overlook others you want to take care of
    Estate laws favor spouses. Payable- or transferable-on-death accounts automatically go to the closest living relative. It will not go to a charity or life partner unless designated otherwise.
  • Fail to get permission to bequeath your qualified retirement plans
    By law, spouses are first in line to inherit retirement funds and assets. (subject to right-of-survivorship laws) If you wish to leave the money to someone else, your betrothed must sign a written waiver… or the deal is off.
  • Assume your wishes are on file
    Don’t take it on faith that a beneficiary form you filed 30 years ago is still there. Or that when you switch plans, your beneficiary form automatically transfers. Get copies from every bank, fund, and insurance company. Regularly.
  • Update forms incorrectly
    Marking up beneficiary forms and initialing your changes won’t hold up in court. To override your old requests, make changes in writing. And give a copy to the institution where the original is (hopefully) on file. Then get copies – regularly.
  • Keep your plans a secret
    Have a record of all your assets, wishes, and plans. Let your loved ones know where to find those records. You don’t want your loved ones scrambling to figure things out while they’re grieving.
  • Misspell names
    You must correctly spell the full legal names of all your heirs. You must also provide the correct Social Security numbers, if requested. You don’t want to cause your loved ones pain because of a typo.

At Independence Wealth, we help our clients stay on top of their estate plans. We leave nothing to chance. We know the estate planning process inside and out… so we ensure that our clients have a rock-solid plan in place. And we keep everything up-to-date so there’s no surprises for your heirs.

Moving and Retirement

Moving and Retirement

“Should I stay or should I go?”

-The Clash

Retirement is a daunting thought for some. It is also an exciting time of your life. Now that retirement is here, you may be thinking, should we sell our home and move out of the area or stay where we are comfortable. There are two different decisions that should be considered when relocating during retirement.

The first decision is an emotional one, should I leave my friends, family, and memories behind. If your friends have also started retiring, many may also move away to warmer or more tax friendly states. Your kids may have relocated for work. So, for many, moving to a warmer more tax friendly environment is welcomed. Once you’ve decided you are able to move on, it’s all about the numbers.

It is also important you find a place you enjoy and feel comfortable. The quantitative decision to make is whether it is the right financial decision. When the paychecks stop, every penny seems to matter a little bit more. So, while you were working, paying $10,000 per year in taxes wasn’t the end of the world. Now that your savings will be providing the lion share of your income, you may want to move to a state where the property taxes are less of a burden.

Recently, one of my clients sold their home in New Jersey. They had been looking at properties in Florida where some of their friends had moved. Not only will their taxes be 1/3 of what they were paying. My clients found a beautiful home on a golf course where all they need to do is close the door behind them. The home also has a great layout if mobility ever became an issue for them. This will save them over $2,000 per month and allow them to spend more of their resources on the things they love to do.

Relocating is not for everyone. Family and friends are important. Many of my clients retire to spend more time with their children, grandchildren, and friends. For some people looking to retire, relocating can help make your retirement dreams a reality.