How Does Your IRA and Retirement Plan Fit Together
Your retirement is meant to be a wonderful time where you can finally relax. You no longer have to wake up to an alarm clock to punch a time clock. There’s no watching the clock wishing the work day is over to go and do what you’d rather be doing. Retirement is your time to do your hobbies, spend time with your family, or travel the world. That requires quite a bit of planning to ensure that you can enjoy your retirement years. Your IRA and retirement plan should go hand in hand. Prepare yourself for what you want to enjoy when you’re old enough to retire.
What is An IRA?
An IRA is a money saving vehicle that makes it possible to save for your retirement while deferring taxes until you retire. Any money that is set into your traditional IRA is subtracted from your taxable income that year. This means that your tax liability for that year is now reduced. This can be a double bonus for you when working towards a brighter retirement. Your retirement money can grow without being taxed, and your yearly tax bill will be that much lower.
An easy example is to illustrate this is that your yearly salary is 100,000 dollars, and you decide to put aside the maximum 5,000 dollars for retirement. You’ll have that 5,000 dollars set aside for your retirement account growing based on your IRA investments, and your tax liability for the year will be 95,000 dollars. Once you retire and begin to use the money in the IRA, the tax liability will then be in effect. This example is extremely simplified. There are some rules on whether or not you can deduct the full amount from your tax liability for the year.
How Does Your IRA and Retirement Plan Work Together?
Your IRA and retirement plan work together to help give you the retirement that you wanted. No one wants to deal with falling short of their retirement savings. Or the alternative of having to go back to work because social security is not enough to cover your costs. This is where an IRA can come into play with your retirement plan.
What Are Some Issues That Could Pop up While Building Your Estate Plan?
Taxes are one of the issues between your IRA and retirement plan. Quite a few tax implications are depending on how your IRA is set up. For instance, if you are looking to avoid estate taxes on your IRA after your passing, your sole primary beneficiary on the IRA needs to be your spouse. Any other beneficiaries on your IRA will often result in death or inheritance taxes.
Another potential issue that can occur when your building your estate plan is knowing how much needs to be set aside for you to live comfortably and enjoy your retirement years. No one knows how many years they’ll have after they retire, and for some, there’s a real issue of outliving their expectations. Putting the right amount aside into your IRA isn’t impossible. A great professional can help walk you through this tricky situation.
Also, there are tax implications that can occur in case your IRA and retirement plan outlive you. It can be problematic for your beneficiaries if they have to borrow against the IRA to pay the taxes on it. A scenario like this is possible if the beneficiary doesn’t have any other assets that can pay for the taxes on the IRA. This distribution from the IRA will be added to their gross income which means that they will have to pay taxes on it as well.
It is interesting to note that there are different rules for beneficiaries. When you’re using your IRA and retirement plan to determine your beneficiaries, your will may not be enough. This document is valuable in deciding who gets what after your passing, except it won’t help your IRA. If your situation changes enough that you’ve decided to leave your IRA to other beneficiaries, you must use the beneficiary designation form. Not having an updated form on file means that your last wishes may not be carried out. It can be essential to make sure that the custodian of the account has the most up to date information.
It can be confusing to try to decipher all of the different rules and regulations that surround an IRA and retirement plan. The good news is that you can enlist the help of a family law professional that understand all of the pros of handling your accounts in a particular way and what the drawbacks can be. The Law Offices of Howe & Garside, LTD. are here to help. Our estate planning services can help you with all of the ins and outs of including an IRA with your retirement plan. Contact us today to go over your retirement plan.