Personal Finance Chapter 14: starting early: retirement and estate planning

Defined contribution plan

(individual account plan) consists of an individual account for each employee to which the employer contributes a specific amount annually Does not guarantee a benefit Employer and employee provide funding Forces employees to take more responsibility for retirement

401k plan

(salary reduction plan) - you set aside a portion of your salary from each paycheck to be deducted from your gross pay and placed in a special account Can contribute up to $18k in 2017, and the company matches up to the first 6% of the pretax contributions Tax deferred, tax isn't paid until it is withdrawn Your employer will often match your contributions up to a specific dollar amount or percentage of your salary

Sources of retirement income

This includes: 1. Personal Savings 2. Social Security 3. Retirement Plans 4. Employer pension plans 5, Public pension plans 6. Annuities

Exemption trust will

all of your assets go to your spouse except for a certain amount, which goes into a trust This provides your spouse with lifelong income that will not be taxed

Stated amount will

allows you to pass on to your spouse any amount that satisfies your family's financial goals

Trust

an arrangement by which a designated person manages assets for the benefit of someone else

Simplified employee pension plan (SEP)

an individual retirement account funded by an employer Employer makes an annual contribution of up to $54k Fully tax deductible, earnings are tax deferred Simplest type of retirement plan if a person is self employed Each employee sets up an IRA with a bank or brokerage house It is an IRA funded by the employer

Roth IRA

annual contributions are not tax deductible but the earnings accumulate tax free You can withdraw money from the account tax- free and penalty free after 5 years if you are at least 59.5 years old, or buying your first home You can make contributions after age 70.5

Estate

consists of everything you own

Education IRA

coverdell ESA, a special IRA with certain restrictions Allows individuals to contribute up to $2000 per year toward the education of any child under 18 Not tax deductible Tax free distributions for education expenses Contributions do not reduce current taxes

fully vested

entitled to receive 100% of the company's contributions to the plan on your behalf after a certain # of years with the company

trustor

grantor, the creator of the trust

Simple will

leaves everything to your spouse Used with people with small estates

Traditional marital share will

leaves on half of the AGE to the spouse Other half goes to the children or other heirs

Spousal IRA

lets you make contributions on behalf of your non working spouse if you file a joint tax return May be fully or partially tax deductible

Formal will

made with the help of an attorney Can be typed or preprinted that's filled out Must sign the will in front of 2 witnesses: neither can be a beneficiary, and the witnesses must the sign the will in front of you

Social security

mportant source of retirement income for most americans Package of protection that provides benefits to retirees, survivors, and disabled people

Estate and trust federal income taxes

must file federal income tax returns with the IRS Trusts and estates must pay quarterly estimated taxes

Revocable trust

one that you have the right to end the trust or change its terms during your lifetime

Statutory will

prepared on a preprinted form, available from lawyers, stationery stores, or internet sites Form could include provisions that are not in the best interest of your heirs

Section 403 b plan

salary reduction plans for tax exempt institution Tax deferred Amount contributed is limited by law

keogh plan

self employed retirement plan Designed for self employed people and their employees Have limits on the amount of annual tax deductible contributions

Executor

someone who is willing and able to perform the tasks involved in carrying out your will Tasks include: preparing an inventory of your assets, collecting money due, paying off debts Must file all income and estate tax returns

Defined benefit plan

specifies the benefits you'll receive at retirement age based on your total earnings and years on the job Does not specify how much the employer must contribute each year. Actuary determines the employers contribution Employer provides the funding

Gift taxes

tax collected on money or property valued at more than $14k in 2017 given by one person to another in a single year Give away portions as gifts to reduce taxes

Inheritance taxes

tax collected on the property left by a person in their will Only imposed by state governments

Trustee

the designated person or institution (usually banks) who manages/administers the trust and assets for the benefit of someone else

money purchase pension plan

the employer promises to set aside a certain amount of money for you each year

will

the legal document that specifies how you want your property to be distributed after your death

Probate

the legal procedure of proving a valid or invalid will The full process of how estate is managed and distributed after death

Estate planning

the process of creating a detailed plan for managing your assets so that you can make the most of them while your alive and ensure that they're distributed wisely after your death 1. You build your estate through savings, investments and insurance 2. You ensure that your estate will be distributed as you wish at the time of your death

estate complications

1. Delay in receiving funds 2. Emotionally painful delays 3. Irretrievable loss of some funds

living trust advantages

1. Ensure privacy, trust are private, will is public 2. Assets held in trust avoid probate at your death 3. Enables you to review your trustees performance and make changes 4. Can relieve you of management responsibilities 5. Less likely than a will to create arguments 6. Can guide your family and doctors if you become ill

notes #1

1. Jointly owned property passes directly to the joint owner and may be appropriate for some property, such as a home 2. To reduce your taxable estate, give away assets during your lifetime 3. A married couple can give up to $28k per person per year without incurring a gift tax 4. if Born in 1961, full retirement age is 67 for social security benefits

Retirement income sources

1. Payments from annuities 2. Employer pension plans 3. Public pension plans

Will types

1. Simple will 2. Traditional marital share will 3. Exemption trust will 4. Stated amount will

Retirement planning myths

1. There's plenty of time for me to start saving for retirement 2. Your pension benefits will increase to stay up with inflation 3. I can depend on social security and pension plan to pay my living expenses 4. Medicare will cover all my medical expenses

notes #2

1. To make retirement affordable, reduce your premium payments by decreasing your life insurance coverage 2. When evaluating your investments during retirement, you are more interested in the income from investments to help cover living expenses instead of reinvesting them 3. Retired families spend a greater share of their income for food, housing, and medical care than non retired families 4. During retirement, inflation will probably cause your cost of living to increase 5. Annuity payments are taxed as ordinary income when you receive them

Reviewing your will

1. You moved to a new state with different laws 2. Sold a property mentioned in the will 3 Size and composition of your estate have changed 4. You married, divorced, or remarried 5. Heirs have died or new ones have been born

Using a trust

1. reduce payment of estate taxes and providing for the payment of estate taxes 2. Avoid probate and transfer your assets immediately to your beneficiaries 3. Free yourself from managing your assets while you receive a regular income from the trust 4. Provide income for a surviving spouse or other beneficiary 5. Ensure that your property serves a desired purpose after your death

Private pension plan questions

Ask these questions when it comes to private pension plans 1. What will be the benefits 2. When do i become eligible for pension benefits

estate planning documents

Birth certificates (you, spouse, children) Marriage certificates and divorce papers Legal name changes Military service records Social security document Veterans docs Insurance policies Transfer records of joint bank accounts Safe deposit box records Automobile registration Titles to stock and bond certificates

Annuity

a contract purchased from an insurance company that provides for a sum of money to be paid to a person at regular intervals for a certain # of years or for life

Living will

a document in which you state whether you want to be kept alive by artificial means if you become terminally ill and unable to make such a decision

Codicil

a document that explains, adds, or deletes provisions in your existing will

Estate tax

a federal tax collected on the value of a person's property at the time of his/her death

Holographic will

a handwritten will that you prepare yourself Should be written, dated and signed in your own handwriting Some states don't use this as a legal form

Power of attorney

a legal document that authorizes someone to act on your behalf

Guardian

a person who accepts the responsibility of providing children with personal care after their parent's death and managing the parent's estate for the children until they reach a certain age

Beneficiary

a person you've named to receive a portion of your estate after your death

Living trust

a property management arrangement that goes into effect while you're alive Allows you to receive benefits during your lifetime

Pension plan

a retirement plan that is funded at least in part by an employer Employer contributes to your retirement benefits

Individual retirement account (IRA)

a special account in which the person sets aside a portion of income for retirement

Rollover IRA

a traditional IRA that lets you transfer all or a portion of your taxable distribution from a retirement plan or other IRA

Disclaimer trust

appropriate for couples who do not yet have enough assets to need a credit shelter trust but may have in the future Surviving spouse is left everything

Testamentary trust

one established by your will that becomes effective upon your death Valuable if you are inexperienced in financial matters Best option if your estate taxes will be high

Irrevocable trust

one that cannot be changed or ended Avoid probate but do not protect assets from federal or state estate taxes

Credit shelter trust

one that enables the spouse of a deceased person to avoid paying federal taxes on a certain amount of assets left to him or her as part of an estate

vesting

the right to receive the employers pension plan contributions that you've gained, even if you leave the company before retiring

Adjusted gross estate

the total value of the estate minus debts and costs

Regular IRA

traditional IRA, lets you make annual contributions til age 70.5 Contribution limit: $5500 per year in 2017 if you are under 50 May be fully or partially tax deductible You can contribute up to $6500 to a traditional IRA if you are over age 50

Intestate

without a valid will, your legal state of residence will step in and control the distribution of your estate without regard for your wishes

Portability

you can carry earned benefits from one pension plan to another when you change jobs

stock bonus plan

your employers contribution is used to buy shares of your employer's stock, which is held in trust until you retire