Advertiser Disclosure

Life Events

Estate Planning Checklist: 6 Key Steps To Take

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

Written By

Estate planning — the process of making a plan for your assets after your death — includes many components, encompassing everything from trusts and wills to life insurance. This article will provide you with a six-step checklist to help you streamline the process of estate planning, ensuring all key aspects are covered.

What is estate planning?

Estate planning is when an individual or family makes plans for the transfer of their assets after their death. Those assets can be transferred through vehicles such as wills and trusts. Wealth that is often considered in estate planning includes the person’s total property, such as real estate, cars, household items and bank accounts.

The purpose of estate planning is to maximize what you’re leaving behind to your beneficiaries or heirs, which often includes minimizing taxes.

Estate planning checklist: What you need to do

1. Take inventory

The first step to crafting an estate plan is to take inventory of all of your assets, debts and other details about your estate. When you take inventory, you should try to include details like the account numbers, intended beneficiaries and the asset’s value.

Be sure to include the following in your inventory:

  • Your background information (such as your marital status) and information on the children you have (if any)
  • Family and other beneficiary information (like Social Security numbers)
  • Bank accounts
  • Brokerage accounts
  • Securities information (such as stocks and bonds)
  • Individual retirement accounts
  • Employer-sponsored retirement plans
  • Insurance
  • Real estate
  • Safe deposit boxes
  • Personal property (like cars and collectibles)
  • Unsecured debts
  • Debts owed to you
  • Business interests

2. Establish your will or trust

An important part of estate planning is writing your will — a legal document that outlines the distribution of your assets after your death. If you don’t have a will, you risk the state deciding how to distribute the assets you leave behind.

Key components of a will include:

  • Who will receive other assets that do not allow for assigned beneficiaries (such as real estate)
  • Information on how those beneficiaries will receive your assets
  • Guardians for minor children

The person who you designate to carry out the wishes outlined in your will is called the “executor.” The legal process of transferring your assets to your heirs is called “probate,” and it can be a lengthy process with various expenses like lawyer fees and court fees.

Inherited assets that are often subject to probate include real estate, cash and retirement accounts that do not have designated beneficiaries and personal property. Probate also consists of the paying of any outstanding debts that you may have left behind to creditors. Only after debts and taxes are paid can the assets be distributed to the heirs you outline in your will.

Another document you can consider adding to your estate plan is a trust, which is a legal contract through which you appoint a trustee to manage your assets through life and after death. Similar to a will, you provide instructions on how you want your estate (such as real estate, stocks and bonds) to be handled after your death.

Your trustee will have legal title to the assets included in your trust. The trustee is also in charge of making sure those assets are distributed to your beneficiaries, based on the specific instructions you provide. Some people opt for a trust over a will, as it allows them to avoid probate.

3. Designate your beneficiaries

Be sure to designate your beneficiaries on accounts that allow for them. A beneficiary is the person or entity who will receive ownership of that asset. You typically assign a beneficiary upon opening an account or signing up for an insurance policy, and will be asked to provide the name and personal information (like a Social Security number) of the beneficiary.

Beneficiary designation is often available for assets including:

  • Retirement accounts (like IRAs and 401(k) plans)
  • Life insurance policies
  • Annuities
  • Payable on Death bank accounts
  • Transfer on Death investment accounts
  • Property that has joint tenancy with rights of survivorship

With designated beneficiaries, assets are directly transferred without having to consult the written will or go through probate. By skipping the process of probate, your heir will be able to save time and money.

While you should include your beneficiaries in your will, certain financial products — like retirement plans and insurance policies — require you to assign a beneficiary on that particular account. This is important to keep up to date, because in the case that an asset in the will is named to someone different from the account’s beneficiary, the asset will go to the account’s beneficiary, as it has greater authority than the will.

While you’re reviewing and designating your beneficiaries, consider adding a contingent beneficiary — which acts as a backup beneficiary if your primary beneficiary cannot receive the benefit.

4. Consider life insurance

Another component of estate planning to consider is life insurance. When you take out a life insurance policy, you will pay a premium over the term of that policy. In the case of your death, those proceeds will then go to whoever you designate as the life insurance’s beneficiary.

There are a variety of life insurance policies — term and permanent are popular choices — which can be purchased through a broker, insurance company or through your employer.

While life insurance isn’t necessarily as mandatory as a will or trust, it is a useful tool that you should consider incorporating into your estate plan, especially if you have dependents but don’t have enough assets built up to care for them if you unexpectedly pass. Explore the life insurance policies available to you and whether they have a spot in your estate plan.

5. Establish your directives

Your estate plan should include a number of directives (in addition to your will or trust) in which you hash out how you want certain aspects of your estate handled — and by whom. When crafting your estate plan, be sure to include the following directives:

  • Advance health care directive: With this directive, you will designate a healthcare proxy to make decisions for you if you’re unable to do so yourself, as well as outline specific medical instructions if you become unable to make those decisions yourself (this is also called a living will).
  • Durable power-of-attorney for finances: This directive will allow you to designate someone to make financial decisions — like handle bill payments and pay for medical expenses — on your behalf if you’re unable to do so.

6. Plan for estate taxes

Since one of the desired outcomes of a good estate plan is to minimize estate taxes that are passed down to your heirs, planning is key. Keep in mind your estate could be subject to federal and state inheritance or estate taxes. As part of your estate planning, you’ll want to research which taxes your estate may be eligible for, and begin strategizing how to minimize them.

For example, strategies that are often used to minimize estate taxes that take advance planning include:

  • Reducing the value of your estate by making annual gifts to your children (under a certain dollar amount) or making charitable donations
  • Placing your assets in a trust
  • Buying extra life insurance policies in advance that will cover the cost of hefty estate taxes

Benefits of estate plans

Creating a solid estate plan is no easy feat — but the benefits of having one are certainly worth all of the hard work. The main benefits of estate plans include:

  • Peace of mind: You’ll know that your loved ones will be taken care of to the best of your ability, and your estate won’t end up in the state’s hands. Additionally, you’ll have plans as to what should happen to you if you become unable to make your own medical decisions — which should also provide a sense of comfort and relief.
  • Protection of privacy: Having an estate plan — as opposed to just a will — helps protect your estate’s privacy by potentially avoiding the public probate process.
  • Save on taxes and fees: With an estate plan, you should have a strategy on how to minimize estate taxes, as well as any court fees that could come up in the probate process.

Do you need an estate planning attorney?

You might need to enlist the help of an attorney — or even a tax advisor — when crafting your estate plan, especially if you have complex situations such as having a disabled child, owing estate taxes or owning your own business.

Attorneys are often touted as well worth it when it comes to estate planning, as they can help you minimize taxes and fees and help you avoid costly mistakes. An attorney will also be able to help guide you through all of the different types of legal documents that are part of a well put-together estate plan.

A solid place to start shopping for an estate planning attorney includes the American College of Trust and Estate Counsel. If you’re concerned about costs, be sure to shop around for different quotes and get multiple bids.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Advertiser Disclosure

College Students and Recent Grads, Life Events, Pay Down My Debt

How Does a 401(k) Loan Work?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

Written By

Reviewed By

A 401(k) loan allows you to borrow from money in your retirement account. With this type of loan, you don’t make payments to a lender. Instead, your payments including interest go back into your 401(k).

This type of loan can be appealing, as there generally aren’t credit requirements and interest rates are low, typically one point below the prime rate. However, borrowing from your retirement plan can cost you more money in lost earnings compared with fees charged on traditional loan products like a personal loan.

Read ahead to see if a 401(k) loan may be worth pursuing for you.

What is a 401(k) loan?

With a 401(k) loan, you borrow money from your retirement account. Payments are typically deducted from your paycheck and you can usually select whether you want to pay back the loan on a quarterly or monthly basis.

401(k) loans are a flexible form of financing. Ways you could use this loan include:

  • Home or car down payment
  • Paying back debt
  • Home renovations
  • Childcare expenses
  • Education expenses, such as graduate school

Interest rates for these loans are typically one point above the prime rate. As of March 2020, the prime rate is 3.25%, meaning your loan would carry an interest rate of 4.25%. Unlike traditional loans, each 401(k) plan is allowed to set its own interest rate, you can check your summary plan description or ask your employee benefits administrator for details about your plan.

The borrowing limit is the lesser of $50,000 or 50% of your total balance, and the maximum repayment term is usually five years. The exception is if you use the loan toward your primary residence, in which you might have up to 25 years to pay it back. There isn’t a penalty for early repayment.

401(k) loans: Benefits and drawbacks



  • Easier to secure than other forms of financing and requires no credit check.
  • Won’t affect your credit score if you default.
  • Payments are normally deducted from paychecks, making you less likely to fall behind.
  • Is often more costly than other forms of financing in the long term because of missed retirement earnings.
  • Doesn’t build your credit history or help your score like other types of financing.
  • Not all plan administrators allow 401(k) loans.
  • If you leave your job, the money will be counted as a distribution, and you could be penalized and taxed.
  • If you leave your job, you will likely have to pay back the balance within 90 days.

How to apply for a 401(k) loan

If you’re interested in borrowing from your 401(k), you can apply through your 401(k) plan administrator’s website. Your employee benefits administrator will be able to help you find the proper webpage to apply if you’re unable to.

When applying for a 401(k) loan, you may asked for basic information such as:

  • Loan amount
  • Loan duration
  • How often you are paid
  • State of legal residence
  • If the loan will be used to purchase a primary residence

The application process for 401(k) loans doesn’t include a credit check because you’re borrowing your own money. However, if you’re married, your spouse might be required to sign off on the loan.

How much can you borrow?

Figuring out how much you can borrow from your 401(k) can be somewhat complicated.

If you haven’t had an outstanding 401(k) loan balance in the past 12 months, you are allowed to borrow the lesser of:

  • $50,000, or
  • 50% of your vested 401(k) balance, or
  • Up to the full balance if your vested amount is $10,000 or less, or
  • Up to $100,000 if you qualify for the coronavirus-related relief provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

If you have had an outstanding 401(k) balance within the past 12 months, the amount you’re allowed to borrow is reduced by the largest balance you had over that period.

Here are some examples:

  • Example #1: Chris has $12,000 vested in his 401(k) and has not had a 401(k) loan balance in the past 12 months. He is allowed to borrow $12,000.
  • Example #2: Isabelle has $30,000 vested in her 401(k) and has not had a 401(k) loan balance in the past 12 months. She is allowed to borrow $15,000.
  • Example #3: Michael has $160,000 vested in his 401(k) and has not had a 401(k) loan balance in the past 12 months. He was recently diagnosed with COVID-19. He is allowed to borrow $100,000.
  • Example #4: Eliza has $50,000 vested in her 401(k) and did have a 401(k) loan balance of $10,000 within the past 12 months. She is allowed to borrow $15,000.

What happens after 401(k) loan approval

Once you’re approved to borrow the money, you will sign an agreement to pay the loan back with interest within five years. Putting the money toward a house means the term may be extended to a maximum of 25 years. Funds are typically dispersed in your next paycheck, although this varies by company.

Payments will be automatically deducted from your paycheck until the loan is repaid. While the principal and interest you pay is credited to your 401(k) account, the interest is typically less than the investment earnings that would have resulted on your loan balance had you not taken the loan, which reduces your retirement earnings.

If you leave your job suddenly, the remaining loan balance is typically considered a distribution. That means your employer will report it to the IRS and you’ll be hit with a 10% early distribution tax on the outstanding balance.

What happens if you default on your 401(k) loan?

A 401(k) loan defaults if you aren’t able to comply with the terms of the loan and pay it back on time. That means you either didn’t make a regular payment, or you left the company and didn’t pay the loan back before your income tax return is due.

When that happens, the remaining loan balance is counted as an early distribution from your 401(k). An early distribution has the following ramifications:

  1. Unless you’re already 59½ or meet other special criteria (including coronavirus-related relief distributions), the money will be taxed and hit with a 10% penalty.
  2. The defaulted amount can’t be rolled over into an IRA, meaning you can’t avoid the taxes and penalties.

CARES Act increases borrowing limits, adds borrower protections

If you’ve been negatively affected by the COVID-19 crisis, you may be able to do an early withdrawal of 100%, or up to $100,000, of your account balance, because of the CARES Act provisions to help Americans through the crisis. You’ll need to check with your employer to see if your plan has adopted the new rules.

You can borrow more under the CARES Act provisions if:

  • You, your spouse, or your dependent were diagnosed with COVID-19 through an FDA-approved test, or
  • You’ve had financial hardship because of having been quarantined, laid off, furloughed, or had hours cut because of the pandemic, or
  • You’re unable to work because of trouble securing childcare during the pandemic or
  • You’ve had to scale back or close your business because of the pandemic.

Tax-deferred accounts affected by the CARES Act changes include traditional IRAs and employer retirement plans including 401(k), 401(b), and other defined contribution plans. It also gives you more time to pay the money back, allowing for repayments to coronavirus-related relief distributions to be deferred for up to a year.

The CARES Act can also protect you if you leave your employer before the loan is paid off. You won’t be charged the extra 10% tax you’d typically pay for early distributions. Tax payments for early 401(k) distributions can be spread out for up to three years, while taxes for 401(k) distributions are usually paid the same year.

401(k) loan vs. 401(k) withdrawal: What are the differences?

401(k) loans typically aren’t dependent on circumstances. Many retirement plans also allow for you to withdraw money from your plan early in case of hardship. These 401(k) withdrawals are supposed to be used for immediate and heavy financial needs, so consumer purchases such as for a vehicle typically don’t qualify. The IRS considers the following as immediate and heavy expenses:

  • Medical expenses for you, your spouse, or your dependent
  • Expenses related to purchasing a home
  • Rent or mortgages payments being made to avoid foreclosure or eviction
  • Tuition and education-related expenses
  • Funeral or burial expenses
  • Expenses to repair damage to your home

Hardship withdrawals are subject to income taxes and might be subject to a 10% tax for early distributions.

FAQ: 401(k) loan

Yes, you can use a 401(k) loan toward paying for a house. You’ll also have longer to repay the loan – up to 25 years compared with the typical five years.

Loans are typically repaid within five years, though many personal finance experts recommend paying it off in three years or less to minimize the loss in retirement earnings. As noted earlier, the exception is if you’re buying a house, in which you have up to 25 years to pay back.

No credit check is required for 401(k) loans, and it’s often just a matter of requesting the amount. If you’re married, your spouse might be required to sign off on the loan.

How long it takes your money to arrive varies depending on your company and plan and could take days or weeks.

There is no penalty for paying back your 401(k) loan early.

If you leave your employer, you have until you file income taxes to pay back the loan. If not, it defaults and is counted as an early distribution. You will be taxed and could be penalized 10% unless you qualify for the CARES Act or another exception.

Borrowing from a 401(k) tends to be more expensive than other types of borrowing in the long-term because of lost retirement earnings. 401(k) loans can be useful when there is an immediate financial need and the borrower has exhausted other options.

On the other hand, if you can repay the debt early, a 401(k) loan can be more appealing than financing with a higher interest rate and/or prepayment penalties.

  • Personal loans can be used for a variety of options, including consolidating debt and home expenses.
  • A balance transfer credit card may be a viable option for borrowers with high credit scores who want to refinance or consolidate credit card debt. These cards can come with an introductory 0% APR for 12 to 21 months.
  • Homeowners can utilize a home equity loan, which allows you to tap the value you have in your property. The loan is secured through your house, meaning you can access lower interest rates than on other types of loans. However, if you default on the loan, you risk losing your home.
  • Payday, title and pawnshop loans can offer short-term cash but should only be explored with extreme caution because they are often incredibly expensive to repay.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Advertiser Disclosure

Life Events, Mortgage

What is Mortgage Amortization?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

Written By

Getty Images

The difference between your home’s value and how much you owe on your mortgage is your home equity. With each mortgage payment you make, mortgage amortization — or paying down the loan in installments — is at play, and each monthly payment brings you closer to owning your home outright.

See Mortgage Rate Quotes for Your Home

See RatesSee RatesSee RatesTerms Apply. NMLS ID# 1136

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

What is mortgage amortization?

Mortgage amortization is the process of paying off your loan balance in equal installments of principal and interest for a set time period. The interest you pay is tied to the balance of your loan (your principal) and the mortgage rate. When you first start making payments, most of the payment is applied to the interest rather than the principal.

Your principal payments catch up with interest over time until your loan is paid off. Once it reaches a zero balance, it becomes a “fully amortized loan.”

How mortgage amortization works

The easiest way to understand mortgage amortization is to look at how monthly mortgage payments are applied to the principal and interest on an amortization table. There are two calculations that occur every month.

  1. The first calculation measures how much interest is paid based on the rate you agreed to. The interest charge is recalculated each month as you pay down the balance, and you pay less interest over time.
  2. The second calculation reflects how much of the principal you pay. As the loan balance shrinks, more of your monthly payment is applied to your principal.

If you’re a math whiz, here’s the formula:

A mortgage amortization calculator does the heavy lifting for you. You can see the effects of amortization on a 30-year fixed loan amount of $200,000 at a rate of 4.375% below.

In the first year, you pay more than twice as much toward interest as you do toward the principal. However, the balance slowly drops with each additional payment. By the 15th year, principal payments outpace interest and equity starts building at a much faster pace.

How mortgage amortization can help with financial planning

A mortgage amortization table helps you assess the short- and long-term benefits of adjusting your mortgage payments. Making extra payments over the life of the loan or refinancing to a lower interest rate or term could save you thousands in interest charges over the life loan. Even better: you’ll end up with a mortgage free home sooner.

Using a mortgage calculator to configure a few scenarios, here are some financial goals you might be able to accomplish using mortgage amortization.

Calculate how much money you can save by refinancing

If mortgage rates have dropped since you bought your home, consider refinancing. If you’re in your forever home and don’t plan to move for a while, a half-percentage point drop in rates could make room in your budget to boost retirement savings, your emergency fund or put money toward other long-term financial goals.

The example below shows the monthly payment and lifetime interest savings if you replaced a 30-year, fixed-rate loan for $200,000 at 4% with a new loan with a 3.5% interest rate with the same terms.

While saving $56.74 per month on payments doesn’t seem like much, it adds up to $20,426.83 in interest savings over the loan’s lifetime.

See the effect of making extra payments

The amount of interest you pay every month is directly connected to your loan balance. Even a small amount added to the principal each month reduces interest over time. The graphic below shows how much you’d save adding an extra $50 every month to your payment on a $200,000, 30-year fixed loan with an interest rate of 4.375%.

Figure out when you can get rid of PMI

Borrowers who don’t make a 20% down payment on a conventional mortgage typically pay for private mortgage insurance (PMI). The coverage protects a lender against financial losses if you don’t repay the loan.

Once your loan-to-value ratio, or the loan balance in relation to the home’s value, reaches 78%, PMI automatically drops off. Multiply the price you paid for your home by 0.78 to determine where your loan balance would need to be for PMI to be canceled. Locate that balance on your loan payment schedule for a rough idea of the month and year PMI will end.

Decide if it’s time to refinance an adjustable-rate mortgage

Adjustable-rate mortgages (ARMs) are a helpful tool to save money on monthly mortgage payments. However, ARMs make more sense if you plan to refinance the loan or sell your home before the initial fixed-rate period ends and the loan resets to a variable interest rate.

An adjustable-rate mortgage amortization schedule helps you pinpoint when the loan will reset and gives you an idea of the worst-case scenario on payments. If the adjustments are outside of your comfort zone, consider refinancing your ARM into a fixed-rate mortgage.

The difference between a 15-year fixed and 30-year fixed payment schedule

Refinancing to a shorter term, such as a 15-year fixed mortgage, may save you hundreds of thousands of dollars over the life of a loan — but the trade-off is a higher monthly payment.

The graphs below show the difference between a 30-year amortization schedule for a $200,000, fixed-rate loan at 4.375% and a 15-year amortization schedule for the same loan amount at 3.875%.

The lifetime interest savings for a shorter loan payment schedule is $95,447.16. As long as the $468.31 increase in your mortgage payment doesn’t prevent you from meeting other savings or investment goals, the long-term savings are worth it.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.