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Life Events

The Ultimate Guide to Creating an Estate Plan

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Estate planning is probably the last thing you want to think about as you start your family.

You’re bringing life into the world, which is joyous and happy. But estate planning is all about what happens when life ends, which is morbid and depressing.

You may also think that estate planning is only for rich people. If you haven’t yet built up much savings, or if you’re still working your way out of debt, you might wonder whether it’s actually important to tell people what to do with your money.

The truth is that estate planning is both important and empowering, no matter how much money you have. And that’s especially true when you have young children, because your estate plan is how you ensure that your family will always be taken care of, no matter what.

In this guide you’ll learn everything you need to know about estate planning so that you can make sure your family’s future is secure.

Why You Need an Estate Plan

The main reason to create an estate plan is to make sure that your family will be taken care of both physically and financially after you’re gone.

Physically, you get to decide ahead of time who would take care of your children — and other dependents — if you and your spouse or partner are no longer able to do it yourselves.

Financially, you get to make sure that there’s money available for your children, and you get to decide who would be in charge of managing that money until they’re old enough to do it themselves.

In other words, your estate plan is how you get to keep being a parent after you die. Your kids will continue to be taken care of because you set it all up ahead of time.

And if that isn’t enough, Bomopregha Julius, an estate planning attorney in New York City, suggests two other reasons to create an estate plan:

  1. It’s really for your family, not for you. Whether you have an estate plan or not, your surviving family members will have to figure out what financial assets you have and what to do with them, all at a point in time when they’ll be grieving your death. By creating an organized estate plan, you give them the tremendous gift of making that process as easy as possible.
  2. Build generational wealth. An estate plan is how you break the cycle of poverty and build generational wealth. By being intentional about leaving money behind to the people you care about, you create a stronger foundation for the next generation to build upon.

With that as your motivation, let’s talk about what goes into a good estate plan.

8 Key Components of a Solid Estate Plan

1. Your Will

A will serves two main purposes.

First, and most important, it’s the only place where you can name guardians for your children. This is why a will is essential for all young families, regardless of your financial situation.

Second, your will is how you pass on assets and possessions that don’t allow you to designate a beneficiary (more on beneficiaries below). Things like cars, furniture, and jewelry can all be passed down through a will.

The downside of a will is that it has to go through a process called probate. Probate is the court process of reviewing and executing your will, and it can be time-consuming and expensive. Family and friends can also challenge your will during probate, with the final decision up to the judge, which can lead to outcomes that may not be exactly what you intended.

For that reason, it’s usually a good idea to pass on as much of your money and possessions as possible through other avenues. Which brings us to…

2. Your Beneficiary Designations

Many bank and investment accounts, as well as life insurance policies, allow you to name beneficiaries or make payable on death designations. These designations allow you to specify who the money in those accounts would go to upon your death.

The benefit of these designations is that they allow the money to be transferred without going through probate, which means your family can get the money quicker, easier, and with more certainty.

You just need to be aware that these designations take precedence over anything you have in your will. That’s what allows them to skip probate, but it also means that updating your will often isn’t enough to keep your estate plan up to date. You need to make sure you keep your beneficiary designations current as well.

3. Life Insurance

Life insurance is one of the best ways to make sure that there will always be enough money for your surviving family members. This is particularly true when you have young children, since there is a long time between now and the point at which they’ll be able to support themselves.

Typically, both working and non-working parents should have at least some amount of life insurance.

For working parents, it primarily serves to replace lost income. For non-working parents, it helps the family pay to replace all of the duties they perform. And in all cases it can help the surviving family members navigate a challenging transition period without worrying about how they’ll pay their bills

Term life insurance is the type that most people need, but you can get a detailed breakdown of the options available to you here: Term vs Whole Life Insurance.

4. Financial Power of Attorney

A financial power of attorney designates someone to handle your finances in the situation where you’re temporarily incapacitated. This could, for example, allow someone to access your checking account and pay your bills.

You could set this up as a permanent right or you could make it conditional upon certain medical diagnoses. You can also limit which accounts the person is able to access and which actions he or she is able to perform.

Regardless, this ensures that your financial obligations can be handled even when you’re not able to do it yourself.

5. Health Care Power of Attorney

A health care proxy is essentially the same as a financial power of attorney, but for health care instead of finances.

It designates someone to be in charge of your medical decisions in case you’re ever not able to make them for yourself. Designating someone you trust as your health care proxy will make it easier for your doctors to care for you in a way that aligns with your personal values.

6. A Living Will

Your living will allows you to decide ahead of time how you’d like end-of-life decisions to be made. That might sound pretty morbid, but this helps ensure that you’re treated the way you want to be treated AND takes some of the responsibility off the shoulders of your family members to make some of those difficult decisions for you.

7. List of All Your Important Accounts

One of the most difficult jobs for surviving family members is often simply finding and accessing your bank and investment accounts. If they don’t know where they are, it’s pretty challenging to claim the money.

So at the very least, making a list that details which accounts you have at which institutions can eliminate a lot of the struggle. For some accounts, it may also make sense to securely share your username and password so that there’s always someone who can access them if needed.

8. A Written Summary of Your Wishes

While your estate plan should always be laid out formally using the tools above, it can also be helpful to provide a written summary of what you want to happen.

While it won’t be legally binding, it can help to explain your wishes in an easily understood format, which could make it easier for your survivors to execute your plan correctly.

When to Consider a Living Trust

While the eight items above are essential for any good estate plan, some people might also benefit from creating a revocable living trust.

A revocable living trust is a legal entity that you create and control. You can then transfer ownership of certain assets to the trust, and those assets are then bound by the terms of the trust, which specify how those assets should be disbursed upon your death.

For example, it’s common for spouses to create a living trust in which they are both trustees, meaning that they both have full access to all the assets owned by the trust and can modify the terms of the trust at any time.

Then they will transfer checking accounts, savings accounts, and non-retirement investment accounts to the trust. They can also name the trust as the beneficiary of their life insurance policies. And because they are trustees, they can manage those assets in the exact same way as if they owned them individually, with the difference being that those assets will now automatically pass to surviving family members according to the terms of the trust.

That might sound like a lot, and it may also sound redundant with the purpose of your will and your beneficiary designations. But there are two big benefits to this approach.

The first is that all assets owned by the trust skip probate. Probate can be a long and expensive process, and skipping it means that your money is passed on to your family members quicker, at a smaller cost, and with less chance for your desires to be overturned.

The second is that you have more control over certain decisions, such as when your children get access to your money. Instead of them inheriting your life insurance proceeds at age 18, for example, you can stipulate that they wouldn’t receive the money until age 25, when they might be better prepared to handle it. You can even put in provisions that protect the money from a messy divorce or from creditors. Trusts are flexible tools with a lot of room for you to set them up as you please.

The Cost

The big downside is the upfront cost. A will and all the other documents might cost anywhere from $50 to a few hundred dollars to set up, while a living trust will usually cost a couple of thousand dollars. The flip side is that it may actually save your family money in the long run by cutting out most of the probate process, but that doesn’t make it any easier to afford the bill now.

In general though, a living trust is a good idea if you can afford the upfront cost without sacrificing your basic financial security. It makes things quicker, easier, less expensive, and more certain for your surviving family members.

And remember that even if you don’t have much in the way of savings, your children might stand to inherit significant life insurance money. A living trust can make sure that that money is managed properly by the right people until your children are old enough to manage it themselves.

Hiring an Estate Planning Attorney vs. Doing It Yourself

Armed with all that information, there’s still one big question left to answer: how should you get it all in place?

It used to be that you had to go through an estate planning attorney, but as the world turns digital there are now a number of online tools that can help you get these documents in place quickly and inexpensively.

So which route should you take? Let’s look at the pros and cons of each approach.

The Pros and Cons of Doing It Yourself

There are a number of websites now that offer guided, DIY estate planning packages with all the essential documents. Some of the biggest are Nolo, LegalZoom, and Rocket Lawyer.

The biggest appeal of these tools is typically the cost. They currently range from $54.99 to $149 per person, which in some cases could be significantly cheaper than working with an attorney.

They’re also quick. Working with an attorney likely requires at least one in-person meeting, and often more to get everything handled, while the online tools might allow you to complete everything in just a couple of hours.

And for simple situations, many attorneys use a template similar to what these tools offer anyway, so you may not be getting a much different product.

The biggest downside is that you don’t get the guidance that comes from working with a good estate planning attorney. Given the importance of getting your estate plan right, that could be costly.

The DIY tools aren’t great for more complicated situations either, such as setting up a living trust or creating a plan for a second marriage. Those situations have more moving parts, and that’s where an experienced attorney can be very helpful.

The Pros and Cons of Hiring an Estate Planning Attorney

Working with an estate planning attorney has essentially the opposite set of pros and cons.

The biggest downside is simply the cost. It’s typically at least a few hundred dollars to work with an attorney, and it may be upward of $1,000. It really depends on where you live though, and even then there’s often a wide range, so it’s worth calling around.

The main reason to work with an estate planning attorney is for the guidance they offer. A good attorney will take the time to get to know you, to understand what’s important to you, and to explain all of the options available to you. The decisions you’re making are not always simple or easy to understand, so that kind of guidance can be invaluable.

Along with that comes the confidence of knowing that your plan is done right, both in terms of being set up the way you want and in terms of adhering to specific state laws that the online tools may or may not be aware of.

Similarly, your surviving family members may be in a better position to carry out everything with the guidance of the attorney who helped you create your plan and knows exactly what you wanted and how everything should work. Again, anything you can do to make things easier for your family is a huge gift.

Finally, working with an attorney may make it easier for you to make changes and updates as you move along, since he or she will already be familiar with your plan and have all the documents you originally created. So if you have a child, get divorced or remarried, or want to update the guardians in your will, your attorney can help you make those changes efficiently within the context of your overall estate plan.

Questions to Ask Before You Hire an Estate Attorney

Can you afford the cost of the attorney without sacrificing your financial security?

Can you find an attorney who cares about getting to know you personally and helping you craft a personal estate plan?

If the answer to both of those questions is yes, the cost of hiring an attorney is well worth it. Otherwise, the DIY tools are probably sufficient as long as your situation is relatively simple.

How to Find an Estate Planner

  1. You may have access to discounted legal services through your employee benefits.
  2. The National Association of Estate Planners & Councils has a search tool you can use.
  3. WealthCounsel is another organization that offers a helpful search tool.
  4. You can always simply Google “estate planning attorney” + your city/state to find one near you.

Where to Keep Your Estate Planning Documents

Once you have your estate planning documents in place, there’s still one big question to answer: where should you keep them?

This may sound trivial, but it’s actually pretty important. Remember, these documents tell everyone else how your family and your money should be cared for after you die, meaning you won’t be around to help them figure it out. So your main goals here are two-fold:

  1. Ensuring that there are always up-to-date copies stored somewhere.
  2. Making it easy for your surviving family and friends to access those documents if needed.

Here are a few options.

1.Your Attorney

If you work with an attorney, he or she will usually be able to keep a copy of all of your important documents on hand. This is a great way to make sure that those documents will always be available, even if something happens to your copies.

It’s also a good way to make sure that someone who knows what they’re doing is leading the way. Your attorney will already know who’s in charge of what and should be able to guide everyone else to make sure that things run smoothly.

2. A Safe

Even if you’re relying on an attorney, you’ll walk away with a number of physical copies of all your documents that you should hold onto in case originals are eventually needed. And it may be a good idea to keep them in a fireproof and waterproof safe, just to make sure they won’t get damaged in an accident.

3. With Friends and/or Family

Throughout the estate planning process, you’ll be naming a number of people who would be in charge of taking care of your children and handling your financial affairs if you die. You should already be talking these decisions through with them so that they know what’s expected of them, and it may also be a good idea to give them a copy of important documents so that they’re easily accessible if the need arises.

4. Digital File Share

Storing your files digitally using a service like Google Drive or Dropbox is a great way to make sure you always have backup copies, and it also makes sharing those documents with others easy.

You could also looked into a paid service like Everplans, which is specifically designed for storing and sharing sensitive estate planning documents. They also offer some customer support that may be helpful if you need a little guidance.

The Gift of a Good Estate Plan

If you’re like most people, you’ll probably procrastinate on putting your estate plan in place. It’s not an enjoyable topic, and it’s a cost that’s not easy to take on when you’re already paying for child care and everything else.

But a good estate plan is a gift, both to you and your family.

You get the gift of knowing that your family will be taken care of, no matter what. And your family gets the gift of having the transition period after your death be as easy as possible, giving them space to grieve and get their lives together without worrying about the financial side of things.

That’s the value of a good estate plan.

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Life Events, Mortgage

What is Mortgage Amortization?

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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.

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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.

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Life Events

When Do You Need to Start Taking Required Minimum Distributions (RMDs)?

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When you reach age 72, the government requires you to begin withdrawing money from your retirement savings accounts each year. This sum, known as a required minimum distribution (RMD), allows the IRS to begin collecting income tax on the dollars you’ve stashed away in tax-deferred accounts such as a 401(k) or traditional individual retirement account (IRA).

What is a required minimum distribution (RMD)?

Regulations governing most retirement accounts state that you cannot leave funds in the account indefinitely. Even if you don’t need the money, the government requires you to begin reducing the overall balance in most accounts by a set sum each year — the required minimum distribution — once you’ve turned 72.

The precise amount of each person’s required minimum distribution is determined by the IRS based on life expectancy and total savings. The RMD rule only applies to tax-deferred accounts or accounts that allow people to reduce their taxable gross income each year by the amount they set aside in the plan.

Because tax-deferred accounts provide upfront tax savings, the IRS waits to collect taxes on contributions to the accounts and any subsequent investment gains until the money is withdrawn. Here’s a full list of retirement accounts subject to the RMD rule:

  • 403(b)
  • 457(b)
  • Profit-sharing plans
  • Other defined contribution plans

RMDs are not required for Roth IRAs or Roth 401(k)s, since contributions to Roth accounts are made using money on which you’ve already paid income tax. Note, however, that beneficiaries who inherit Roth IRAs must take RMDs.

When do I have to start taking RMDs?

You need to start taking required minimum distributions by April 1 of the year after you turn 72. In subsequent years, you need to take RMDs by December 31st.

If you are still working at age 72 and have a traditional 401(k) or 403(b) account with your current employer, you may not have to take an RMD from that account unless you own 5% or more of the company. Review your plan’s exact terms to see if it allows you to wait until you actually retire to begin taking RMDs or if it follows the same 72 rule regardless of retirement status.

Employment, however, won’t help you delay taking RMDs from any individual retirement accounts outside of your employer retirement account, such as a traditional IRA.

You do not have to take your RMD as one lump-sum payment. The IRS allows you to take out the funds in chunks throughout the year too. As long as the total meets the RMD for the year, you’re in the clear.

You’re also not limited to taking only the RMD amount from your account each year — you can withdraw more than that threshold, if you want.

How do I calculate my required minimum distribution?

Just like filing your taxes, it falls on your shoulders to remember to take the RMD once you reach 72. You can do the math yourself (we’ll explain below) to figure out what your required minimum distribution will be, or you can ask for help from a tax professional or financial adviser.

To calculate your RMD, you need to know exactly how much you have saved in your retirement account as of Dec. 31 of the previous year. Next, use the table below (the IRS’s Uniform Lifetime Table) to find your “distribution period” score, which is based on your life expectancy.

To calculate the RMD, divide your retirement account balance by the distribution period that corresponds with your age. Repeat this step for each of your accounts to come up with the total amount you must withdrawal for the year. Remember, your account balances change over time and the IRS can update its distribution period figures, so redoing this math each year is crucial to ensure you take out the correct sum.

Let’s say you turned 72 in December 2020 and had a balance of $1 million in your retirement account as of Dec. 31. You would then find the distribution period that corresponds to your age in the Uniform Lifetime Table.

According to the table, your distribution period number is 27.4. When you divide $1 million by 27.4, you get an RMD of $36,496.35. That is the minimum withdrawal you must make from that account by April 1, 2021.

However, if you’re married and your spouse is 10 years or more younger than you and is the sole beneficiary of the retirement account, you will need to find your “distribution period” score on this alternate table by locating the spot where your age and your spouse’s age intersects.

For instance, if you turned 72 in 2020 and had that same $1 million balance in your retirement account on Dec. 31, but were married to a spouse who’d just celebrated their 59 birthday, your distribution period number wouldn’t be 27.4, but rather 28.1 to accommodate the longer expected lifeline of your spouse.

And this would mean you’d need to take an RMD of $35,587.19 from your account in 2021, or about $909.16 less than you would if you were single or married to a spouse closer to your own age.

What is the required minimum distribution penalty?

If you don’t take your first RMD by April 1 of the year after you turn 72 or your subsequent annual RMDs by Dec. 31 each year, you’ll be slapped with a 50% excise tax on the amount that was not distributed when you file taxes.

That’s a steep fine when you consider that the top tax rate is 37%, which is why it is so important to accurately calculate your RMDs each year, as the tax applies whether you fail to take any money from the account or simply don’t take enough.

For example, if your RMD was $10,000, but you only took out $5,000, you will be assessed that 50% tax on the $5,000 that you did not withdraw.

Remember, if you delay taking your first RMD until April of the year following your 72nd birthday, you’ll be required to take two withdrawals in the same year, one for your 71st year and one for your 72nd year, which could raise your gross income and move you into a higher tax bracket. To avoid this, you can opt to make your first withdrawal by Dec. 31 of the year you turn 71, instead of waiting till the following April.

Alternatively, you could reduce your taxable income by making a qualified charitable distribution paid directly from the IRA to a qualified public charity, not a private foundation or donor-advised fund. The charitable distribution can satisfy all or part of the amount you are required to take from you IRA and won’t count as part of your income.

If you withdrawal the RMD first, then donate it, this trick won’t work as the money will count toward your gross income.

What if I have multiple retirement accounts?

If you have more than one retirement account, things can get a little more complicated. You still need to take an RMD, but you don’t have to take one out of each IRA account. Instead, you can total the RMD amounts for all your IRAs and withdraw the whole amount from a single IRA or a portion from two or more.

However, you can’t do the same with most defined contribution plans, like 401(k)s. With these accounts, you must take an RMD from each plan separately. One exception to this rule, though, is 403(b) tax-sheltered annuity accounts. If you have multiple of these accounts, you can total the RMDs and withdrawal from a single account.

If you own several different kinds of retirement accounts with RMDs, it’s probably a good idea to seek advice from a tax or financial adviser professional who can help you make the wisest decision for your finances.

I inherited a traditional IRA — what should I do?

While it’s great to be left the generous gift of a retirement account by a loved one, inheriting an IRA comes with its own set of tricky RMD rules that can vary greatly depending on your relationship with the original owner and how you chose to use the account.

I inherited a traditional IRA from my spouse

If you’re a spouse and sole beneficiary, you have the most flexibility in how to handle your new IRA. You can choose to treat the IRA as your own by designating yourself the account owner and making contributions or by rolling it over into an existing IRA account that you own. If you choose this option, you can follow the standard RMD rules — meaning you can wait until you turn 70½ to begin taking money from the account.

Alternatively, you can roll the assets into what’s known as an inherited IRA. With this kind of account you can start taking distributions immediately and not face the typical 10% early-withdrawal penalty the IRS applies if you’re under age 59½.

To calculate the RMD you’ll need to take with this kind of IRA, use the IRS’s Single Life Expectancy Table, which has different distribution period figures than the standard table you would use if you were the original account owner. You can opt to use your own age for these calculations or your partner’s age as of their birthday in the year they died, reducing life expectancy by 1 each subsequent year.

But you may not need to take RMDs right away depending on how old your spouse was when they died. If they were older than 70½ then you’ll need to start withdrawing funds by Dec. 31 of the year following their death. But if they were younger, the IRS lets you leave the money in the account until your spouse would have reached 70½.

I inherited a traditional IRA — but I’m not a spouse

Beneficiaries who are not a spouse are required to move the assets into an inherited IRA and begin taking RMDs regardless of the original owner’s age. If the person passed before age 70½ you can opt to withdraw the full balance within the five years following the year of their death. Or you can prolong the payouts by taking RMDs annually based on your age, reducing beginning life expectancy by 1 for each subsequent year, using the Single Life Expectancy Table.

If the original owner was 70½ or older, how you calculate your RMDs depends on whether you or the deceased was younger. The lowest age is what you’ll base your life expectancy figure found in the Single Life Expectancy Table on, though you will need to reduce beginning life expectancy by 1 every subsequent year.

I inherited a Roth IRA — what should I do?

The original owner of a Roth IRA never has to take RMDs but that can change when the account passes to a beneficiary. A surviving spouse who inherits a Roth IRA can opt to treat the account as their own, meaning they won’t ever need to take an RMD, if they contribute to the account or roll into an existing Roth IRA.

Non-spouse beneficiaries, however, do have to take RMDs from an inherited Roth IRA, following the same rules as those who inherit traditional IRAs where the owner passed before reaching age 70½.

That means these beneficiaries can either withdraw the entire balance from the Roth IRA within the five years following the year of the original owner’s death or begin taking RMDs based on your life expectancy, as outlined in the Single Life Expectancy Table, by the end of the year following the owner’s death.

The final word on required minimum distributions

Whether the retirement account was yours to begin with or you’ve inherited it, calculating the correct RMD amount to withdraw from it every year can be tricky, but spending the extra time to make sure you understand the rules and check your math can pay off big time when you’re not losing 50% of your savings to Uncle Sam in the form of a tax penalty.

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