Financial Goals

Apache is functioning normally

Apache is functioning normally

Whether you should halt your retirement contributions in order to focus debt is one of the most heavily debated dilemmas in personal finance.

Unlike “spend less than you earn” or “track every penny you spend“, there’s no cookie-cutter answer to this question. Variables such as age, career, risk tolerance, and even personality type make each individual situation unique.

You’ll Never Win a Race Against High-Interest Debt

Regardless of your personal situation, there are very few circumstances where high-interest debt should not be the top priority. What’s high interest? Well, that’s another fun question to debate. For the purpose of this article, we’ll assume a broad range of anything in excess of 8-12%.

Once you start trying to race against debt with double-digit interest, you’re destined to fail. It’s risky at best and downright irresponsible at worst.

Let’s be honest. If you’re still relying on high-interest debt, 99% of the time it’s a result of not living within your means. There are rare exceptions, but for most of us (myself included), the issue boils down to spending less than we earn.

On Monday, J.D. wrote about the importance of paying yourself first. Like many, I love this advice. However, I’d like to challenge you with this: Only pay yourself first if you deserve it.

You could spend decades socking away 15% for retirement, but if you are living beyond your means, you’ll still lose. You’ll be tapping your 401(k) for a hardship loan. You’ll be upside down in a house with two mortgages and a HELOC. Even with the best intentions, this is a game that you need to get very, very lucky to win.

I don’t want to rely on luck. I don’t want to race high-interest debt.

For me, having positive cash flow with at least a minor emergency fund is a prerequisite to retirement investing. This proves I deserve to pay myself first. Otherwise, it’s my high-interest debt against my retirement contributions. Not a race I’d like to see.

Ready to Rumble

So now where are we?

  • Positive cash flow? Check.
  • Short-term savings? Check.
  • Only student loans and a mortgage…what now?

Now we’re ready to debate! At this point we’ve covered the basics. We’ve plugged the leak in the ship, but still have a bunch of nasty water to bail from the hull.

Once our remaining debt has interest rates in the single digits (setting an exact percentage isn’t the point), the situation becomes less cut-and-dried. There are two schools of thought on the issue.

  • The first preaches that this is the perfect time to make retirement a priority. These folks point out that starting the contributions is the hardest step. They show that the earlier we adopt this as a habit, the better our situation is in the long run.
  • The second school emphasizes the power of focusing on a single goal with all your energy and passion. They profess that intensity and commitment increase the probability that we ultimately succeed in tackling our financial goals. After all, once you eliminate your debt payments, you’ll have an enormous amount of your income to allocate to wealth generation.

I have to admit, I can see both sides. Like many debatable issues, most of us are going to end up somewhere in the middle. In the quest to find balance for our own situations, there are several common factors that are beneficial to explore.

The 401(k) Match

Dave Ramsey suggests going so far as turning down an employer match on 401(k) contributions for a short amount of time (fewer than 18 months) to really focus on your debt. This is where many people draw the line. Actually, that’s putting it nicely. This drives some people absolutely bonkers.

Many exclaim, “But… but.. it’s free money!” That phrase tends to be thrown around a lot. I’m not a full supporter of either side, but I would like to point out that nothing is free, folks. So please stop saying “free money”! Pretty please?

There’s a real and tangible cost to allocating your money in any specific way. There are indirect opportunity costs. There’s the risk that diluting your intensity means you stay in debt longer and thus pay more interest.

Often the math does work in favor of taking an employee match, but that doesn’t make the money “free”. Some 401(k) plans have limited investment options. Or they have vestment periods that stretch out for years. If you aren’t planning to stay with your current employer this could dwindle the value of “free” even further.

Ultimately, there are several reasons someone may decide to opt out of a matching 401(k) program for a short time. Of course, the factors at play vary drastically from employer to employer. Before making a decision either way, it’s important to know as much as you can about your particular 401(k) options.

Other Factors

There are a couple other situations where investing may make sense. Consider the following:

  • First, you only have a specific limit per year that you can contribute to a Roth IRA. (This is currently $5,000 per year — $6,000 per year if you’re 50 or older.) Once you miss the window of availability, you’re out of luck. Your new contributions go toward the current year’s limit. You can’t go back and make up contributions you missed for the past two years once you are out of debt.
  • Second, if you don’t have the discipline to actually apply any new money to accelerate your progress on debt, then don’t halt your retirement. Decreasing your contributions only to spend the difference at the local comic books store (or your vice of choice) may be the single dumbest financial move you can make.

There’s no single answer to this dilemma. In my own life, Courtney and I have chosen to not to invest while still in debt. We live a turbulent life right now, and enjoy the benefits that come with focusing on one financial goal at a time. We’ve also decided to allocate what limited funds we do have into investing in ourselves: training, education, and building a business (our current focus).

Your situation is different. The only thing I will push you to do is consider all your options. Don’t continue making a certain decision just because it’s what you’re doing right now.

Start from a blank slate. Could you benefit from a singular focus? Are you willing to make further lifestyle cuts to increase you current contributions? Examine your options and consider the choices.

How have you attacked this dillemma in your own life?

Source: getrichslowly.org

Apache is functioning normally

Apache is functioning normally

If your heir dies, what happens next? This is an issue that comes up in estate law. If not frequent, it is certainly not rare. After you write your will, what happens if your heirs die before they can inherit? The answers here depend entirely on your state’s laws. Below we discuss the most common outcomes, although readers should note that estate and property are two of the most state-specific areas of the law. Make sure to consult an attorney or financial advisor before making any decisions about your specific needs.

What Happens If You Die Intestate?

First, while a question regarding beneficiaries necessarily discusses a written will, there is the issue of dying intestate. This means that you die without a will and your estate is distributed based on the laws of your state rather than your stated wishes. In most states this means that your assets will be split evenly among your closest next of kin, typically traveling to a spouse, then to children, then to siblings and so on.

Under most, if not all, state laws, intestate inheritance is based on surviving family members. That is to say, the court essentially combs your family tree looking for the next closest relative currently alive. If you had a closer relative, but they have since died, neither their estate nor their heirs have any rights.

For example, say that your state distributes assets first to a spouse, then to children. If your spouse predeceases you, neither their heirs nor their family has any claim to your estate. Instead, if you have children, the estate would pass to them.

Lapsed Gifts in a Will

When your will leaves assets to a beneficiary who is, themselves, dead it is called a “lapsed devise.” Since they’re dead, your named beneficiary cannot inherit. From here, state law dictates who takes these unclaimed assets. This leads to two common outcomes that depend on the specific laws of your state and the circumstances of the inheritance.

Trail of Estate

In many states, the assets will become part of the deceased beneficiary’s estate. This is based on what are called “anti-lapse” laws, meaning laws that specifically address the issue of a lapsed devise. The assets which would go to your beneficiary instead go to their heirs based on the terms of their will or (if they died intestate) state law.

This can occasionally lead to a domino effect if the beneficiary’s heirs have, themselves, died. In that case, the inheritance will continue to pass along as state law and will terms required until the assets reach a living person.

However, the details of anti-lapse laws vary widely. In some states, the assets pass fully to your beneficiary’s estate no matter who they are. In others, anti-lapse laws only apply if the deceased beneficiary was a blood relative or even someone as close as a child or sibling. Still, others may restrict who can inherit from the deceased beneficiary in turn.

The general rule of thumb for anti-lapse laws is this: If the beneficiary is dead and anti-lapse laws apply, the beneficiary’s heirs inherit the assets. The specific application of these laws, however, can be entirely different from state to state.

Residuary Distribution

If no anti-lapse laws apply, then the assets revert back to the estate. They then pass as a standard residuary. This means that the assets have no clear heir under your will, the same as if you had not named a beneficiary at all. From there, the property will typically move in two ways.

First, your residual beneficiary will inherit if you have one. A residual beneficiary is the person or persons you named to inherit any unclaimed assets in your will. In most wills, it’s a good idea to have one and naming a residual beneficiary can be as simple as just adding “all else to this individual.” At the end of the will’s distributions, if there are any remaining assets, this person claims them.

Second, if you have no legitimate or living residual beneficiary, state law applies. When a will has residual benefits and no heir to claim them or if the residual beneficiary themselves has died, typically states distribute the property under their intestacy laws. This means that those specific assets pass to your heirs as defined by state law just as if you had no will at all.

Alternates, Survivorship And Joint Inheritance

There are several exceptions to these rules. The three most common are alternate heirs, survivorship and joint inheritance.

Alternate Heirs

In your will, you can name alternate heirs to receive the property if the primary beneficiary cannot. For example, you might leave a bequest along the lines of “Sally inherited my house. If she cannot inherit, then the house will pass to Richard.” In this case, as the primary beneficiary, Sally inherits your house. However, if Sally dies before she could inherit, then Richard would inherit the house. If he also dies, then lapse and residuary laws would apply and would follow the primary beneficiary (here, Sally).

Survivorship

A survivorship requirement states that the beneficiary of a will cannot inherit unless they survive the deceased for a minimum amount of time. For example, a survivorship requirement might say that a beneficiary cannot inherit unless they outlive the deceased by at least 30 days. A survivorship requirement can delay the close of probate since an estate cannot close until it has distributed all of its assets.

If the beneficiary dies before meeting the terms of a survivorship requirement it is treated as though they died before inheriting. The same rules apply, meaning that the assets would pass first to any alternates, then to any lapsed devise or residual heirs and finally through state inheritance law. Survivorship requirements can be applied by state law or by the terms of the will itself.

Joint Inheritance

Finally, assets in a will can be left to multiple beneficiaries as a group. For example, you might say that a pool of money is to be split equally among your children or you might leave a single house for three family members to share.

When assets are left to a group and one member of that group dies, the matter is decided by the wording of the will. If the will leaves its assets to a generally defined group, for example, “my children” or “my siblings,” then if one member of that group dies remaining heirs will split the assets among themselves.

However, if the will leaves its assets to specifically named members of a group, for example “to Alex, Robert and Julie,” then if one member of the group dies the assets will be treated as a specific inheritance with a beneficiary’s death. In this example, if Alex dies before inheriting, then the analysis will follow the same process as discussed above, with the law first looking for a named alternate, then reviewing the state’s laws on lapsed devices and finally distributing Alex’s share based on the state’s intestacy laws.

The Bottom Line

If a beneficiary to a will dies before they can inherit, the results can range widely. The assets might travel to the beneficiary’s heirs in a chain of inheritance, they might proceed to the will’s residual heir, or the state might handle them as intestate assets. It depends entirely on the circumstances of the will and the laws of the individual state.

Estate Planning Tips

  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • The best way to avoid these issues is by writing your will thoroughly and with care. Here’s how you can do exactly that.

Photo credit: ©iStock.com/Ridofranz, ©iStock.com/JodiJacobson, ©iStock.com/PeopleImages

Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

Source: smartasset.com

Apache is functioning normally

Apache is functioning normally

Have you ever been captivated by the ins and outs of real estate investing, declaring, “I could do that,” or even, “I want to do that,” but couldn’t pinpoint where to start? If so, you’re in luck because this Redfin article is tailor-made just for you. 

Buying your first investment property has the potential to be an exhilarating and profitable adventure. However, let’s face it: the complex landscape of real estate investing can be intimidating without the right knowledge and guidance. But fear not. In this all-encompassing guide, we will unveil a treasure trove of expert tips and invaluable insights that will empower you to fearlessly navigate the process. From relationship building to conducting due diligence, you’ll be equipped with the knowledge and strategies to enter the world of real estate investing and buy your first investment property with ease. Let’s get started!

1. Learn from experienced investors

When it comes to real estate investing, there’s no better way to learn than from those already doing it. Learning from experienced investors can vastly build your understanding of how it works, beginning with market research and ending with either the sale or signing a tenant in your new rental. You can even learn from other investor professionals by identifying if there is a way you can help them. 

“I hear many new investors say that they don’t feel they have anything to offer, but that is untrue,” says Kathie Russell, a board member of the North Carolina Real Estate Investors Association. “Everyone has something to offer. I guarantee that something you do in your day job or as a hobby will be helpful to somebody.” She adds that to begin building your relationships with investors is to find your local REIA. “These groups are an absolute must for new or aspiring investors. There you will meet your lenders, your mentors, your friends, and your advisors.”

2. Assemble your team

Building a reliable team of professionals who specialize in real estate investment can provide invaluable guidance and support throughout the process. Eric Feldman, SVP of Sales and Marketing at Longhorn Investments stresses the importance of knowing who your decision makers are regarding your investment strategy and process. Within the world of real estate investing, everyone is trying to secure the best deal, thus meaning properties move quickly – so having a team of trusted individuals in place is essential. 

You should identify a knowledgeable real estate agent who understands the local market and can help you identify promising investment opportunities. Additionally, having a competent real estate attorney can ensure that your legal interests are protected during negotiations and contract signings. An appraiser will help identify the actual value of a property, which can help you avoid overpaying. Collaborating with an experienced property inspector can help identify potential issues and prevent costly surprises down the line. Lastly, establishing relationships with reputable contractors and property managers can streamline property renovations and day-to-day operations.

3. Rely on market data

When it comes to real estate investing, Doug Van Soest, founder of SoCal Home Buyers, wisely emphasizes the potential risks involved in buying an investment property. However, these risks can be mitigated by leveraging available data. Van Soest suggests conducting a thorough comparative market analysis (CMA) using the wealth of data at your disposal to understand the current state of the marketplace. By examining factors such as property prices, rental rates, vacancy rates, and historical trends, you can make informed decisions and alleviate some of the risks associated with real estate investments. 

4. Consider area potential and long-term equity gains

Buying your first investment property doesn’t necessarily mean it will be where you reside. When considering where to purchase, you’ll want to think about a location’s potential and the possible long-term equity gains associated with the area. 

Scott Jones, the economic development director for the city of Manor, Texas, proudly showcases his community as a shining example of a location’s potential. “Manor either has or is working to have it all as we speak,” says Jones. “Manor is only minutes away from everything Central Texas offers. This includes abundant, relatively inexpensive land for development, a high-quality education system, first-class public safety and utilities, mass transit to Downtown Austin, and much more.” 

Manor, Texas, has seen significant housing growth year over year. In May 2020, the median sales price was $234,000; as of May 2023, the median sales price equals $350,000 (nearly a 50% increase YOY). Consulting with local experts and real estate agents can help identify up-and-coming areas that can play a pivotal role in creating high ROI opportunities.

5. Explore your loan options

When buying your first investment property, it’s essential to explore the available loan options. Understanding and comparing mortgages, government-backed loans, and private financing can greatly impact your financial success. Research and consult experts to make an informed decision that aligns with your investment goals and long-term stability.

Lender, HomeAbroad has a tip about Debt-Service Coverage Ratio (DSCR) loans “While conventional loans may require income and debt to income, DSCR loans evaluate the property’s income potential and cash flow to determine loan eligibility. DSCR loans do not consider investors’ income, making them ideal for investors seeking cash flow-driven investments.”

6. Perform your legal due diligence

Joshua Holt, the founder of Big Law Investors, urges real estate investors to understand the importance of conducting comprehensive legal due diligence before purchasing a property. Holt expands on this by saying, “check the title deeds to ensure there are no hidden encumbrances or disputes, review zoning laws and local ordinances to ensure that the property can be used as intended, and double check that all taxes are clear.”

“The last thing you want is to find out that local laws prevent short-term lease arrangements after you’ve purchased the property for that specific purpose,” says Holt. “Conducting legal due diligence before purchasing the property is important to ensure you protect your investment and avoid costly legal issues later on.”

7. Never buy a property without having an inspection

A home inspection is pivotal in identifying potential flaws within a property. Home inspections can also help determine an investor’s renovation budget and help alleviate newfound stressors throughout the rehab process. 

Ronnie Jackson, general contractor of Austin Home Renovations, urges buyers to “never purchase a property without an inspection provided by a licensed real estate inspector.” Additionally, Jackson adds that you shouldn’t “complete your option period without having that inspection evaluated by a professional contractor.”

8. Don’t forget about taxes

Yes, taxes are a significant component of real estate investing. First, there are property taxes. Tony Trahan, a property tax consultant of KE Andrews, shares that “when buying a real estate investment property, one of the most critical factors during your due diligence or underwriting process is correctly modeling the property taxes owed going forward. In many states, this valuation determines your taxes and is highly negotiated.” 

Capital gains tax is another tax to consider (and budget for), especially if you intend to sell your investment property. There are two forms of capital gains taxes, short-term and long-term. Short-term capital gains tax refers to the tax paid on profits from the sale of assets that have been held for one year or less. It is generally subject to ordinary income tax rates, which vary depending on an individual’s tax bracket. On the other hand, long-term capital gains tax applies to profits from the sale of assets held for more than one year. Long-term capital gains tax rates are typically lower than ordinary income tax rates, offering potential tax advantages for investors who hold their assets for an extended period. The specific long-term capital gains tax rates depend on the individual’s income level and the type of asset being sold.

9. Submit a competitive offer

When making an offer on your first investment property, you should be prepared to act swiftly and present a strong offer with attractive terms, such as a pre-approval letter, a substantial earnest money deposit, and flexibility on closing timelines. While it’s important to be competitive, it’s equally crucial to ensure that your offer aligns with your financial goals and allows for a profitable investment.

10. Get insurance coverage

Whether you’re in the rehabilitation stage of your home flip or are holding a property as a rental, you’ll want to be sure you’re adequately insured. Comprehensive property insurance should protect the structure, renovations, and fixtures, guarding against perils like fire, theft, and natural disasters. Liability insurance is crucial to cover potential lawsuits or claims by others for injuries or property damage. Builder’s risk insurance can safeguard against losses during construction or renovation, while rental property insurance is specifically designed for landlords, covering structures, liability, and rental income loss.

Pegram Insurance Agency elaborates on landlord policies, “which can help protect you financially in case of damage to your property or liability claims.” Understanding which coverage works best for your situation is critical; Pegram Insurance Agency adds that “there’s a big difference between renting to long-term tenants and renting on Airbnb/VRBO. Airbnb and short-term rentals require specific endorsements for additional coverage, so check with your insurance provider.”

11. Renting your property

If your investment strategy includes renting your property, Jordan Davey, digital marketing director of Victory Property Management, offers insights from mitigating rental risks to maximizing received applications. Davey highlights performing screenings on all applicants, reminding landlords to “not take rental applications for face value. Get income verification and be on the lookout for anything that may appear suspicious.” 

Additionally, Davey recommends working with your real estate agent to price the property accurately. It’s important not to overprice a rental home, but equally important to not underprice. Do your due diligence and review accurate CMA data to determine a price best suited to your market’s demands.

A final note on buying your first investment property 

In conclusion, purchasing your first investment property can be an exciting and potentially lucrative endeavor. By considering key factors such as market research, financial analysis, and seeking guidance from professionals, you can set yourself up for success. Remember to approach the process with careful planning, a long-term perspective, and a willingness to adapt as needed. So, take the leap, embrace the opportunities, and embark on your journey as a real estate investor.

Source: redfin.com

Apache is functioning normally

Apache is functioning normally

Most income taxes in the United States are paid by the people with the most income. That is in keeping with the generally progressive nature of the individual federal income tax, the primary source of government revenues, which applies higher tax rates to higher incomes. However, some taxes fall more heavily on people with less income, while the most affluent of all can sometimes pay little or no income tax. A financial advisor can help you plan to manage your taxes.

The Biggest Taxpayers

The biggest source of tax revenue in the United States is the federal individual income tax and the biggest source of individual income tax revenues consists of the nation’s highest earners. In 2023, according to an estimate of the Tax Policy Center, 67% of all federal income tax collected will come from the top 20% of earnings, who were bringing home more than $189,200 annually. The situation where a small minority of high earners pay most of the individual income taxes has remained steady for many years.

Beyond that, figuring out who pays the most total taxes in the United States is complicated by the fact that there are many types of taxes. Federal individual income taxes levied on earnings from working and investing is just one variety, albeit the most important.

Payroll taxes supporting Social Security, Medicare and unemployment benefits are the second-largest source of federal tax revenues. Employers deduct these Federal Insurance Contributions Act (FICA) taxes from workers’ paychecks.

Other taxes include corporate income taxes, estate taxes, gift taxes and customs duties. Excise taxes are assessed on gasoline, alcohol, gambling and some other products and services. These taxes land more or less heavily on different taxpayers. For example, lower-income workers pay a larger percentage of their incomes in payroll taxes than higher-income workers thanks to the cap on income subject to Social Security taxes.

The capital gains tax is a special tax imposed on certain types of investment income that is in lieu of and generally lower than the individual income tax rates. Capital gains taxes are mostly paid by people who have more assets, while people with few assets may pay little or no capital gains tax. Similarly, property taxes, which are the major source of revenue for state and local governments, are only levied on the owners of property such as real estate.

Factors Influencing Who Pays the Most Taxes

A number of factors determine how much someone pays in federal income tax. The interplay between these factors and taxpayers’ efforts to save on taxes while conforming to the tax law, is largely responsible for the complexity of tax planning and preparing tax returns. Here are some of the major considerations.

  • Taxable income: As your income rises, you move into a higher tax bracket, which means more of your income goes to taxes.
  • Filing status: Tax rates vary depending on whether you are filing as a single individual, a married couple filing jointly, a married couple filings separately or as a head of household.
  • Adjustments to income. Retirement plan contributions, student loan interest payments and some other outlays can reduce your taxable income and your taxes.
  • Exemptions: Taxpayers can further reduce income by claiming exemptions, including dependency exemptions for their children.
  • Deductions: Yet another way to reduce taxable income is by claiming deductions. In addition to the standard deduction, you may be able to claim deductions for medical expenses, charitable contributions, home mortgage interest and other costs.
  • Tax credits: Credits for education and energy conservation, among other categories, can not only reduce your taxes but result in the government sending you a check.

Managing your tax liability consists largely of working with these factors. For example, if you have an unusual amount of income in one year, you may be able to use averaging to spread the income among different taxable years, keeping you from moving into a higher tax bracket.

Using the capital gains tax to reduce income taxes is also important. If you have assets that have appreciated in value, you could be subject to a large capital gains tax bill when you sell them. On the other hand, if you never sell them, you may be able to pass them on to your heirs without ever paying any income tax on your increased wealth. Very affluent taxpayers can pay their bills while avoiding income and other taxes by a number of other means, including pledging their assets as collateral for loans, the proceeds of which are not taxable.

The Bottom Line

The people with the highest incomes generally pay the highest taxes in the United States, thanks to the generally progressive individual income tax system used by the federal government. There are some exceptions to this type of policy, as very wealthy individuals can find ways to reduce their taxes – sometimes paying none at all – by making the most of so-called loopholes in the tax code. However, as a rule, the top 20% of earners pay more income taxes than the rest of the tax-paying population put together.

Tax Tips

  • Managing and reducing the amount of taxes you pay can benefit from the assistance of a financial advisor. Finding a financial advisor doesn’t need to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s Federal Income Tax Calculator can help you break down your tax obligations including the total tax as well as the type of tax and your marginal and effective tax rates.

Photo credit: ©iStock.com/Rossella De Berti, ©iStock.com/Drazen_, ©iStock.com/D-Keine

Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.

Source: smartasset.com

Apache is functioning normally

Apache is functioning normally

If you die without naming a beneficiary for your 401(k) account, the rules for your retirement plan will likely require that funds in the account be considered part of your estate and have to go through probate. The probate process is governed by state laws that vary significantly, but can often add considerable cost and delay to settling your estate. You can avoid this by naming beneficiaries, including both primary and secondary ones, and reviewing your selections periodically or when major life events occur. You can plan your estate with the help of a financial advisor.

401(k) Beneficiaries

A 401(k) plan is a tax-advantaged way to save for retirement that many employers offer as a benefit. Plans often allow you to select how funds in the account will be invested, and all allow and encourage if not require you to name one or more beneficiaries.

The beneficiary can be almost anyone you want to be able to control and benefit from the assets in your 401(k) plan after your death. A beneficiary can be a person, such as a spouse or child, as well as a nonprofit charity, religious or educational institution or even a business or other legal entity.

Typically, 401(k) plans will ask you to name beneficiaries when you open these accounts. If you don’t, your plan may remind you from time to do this. It is to your benefit to do so because it enables easy and cost-free transfer of control of assets after your death.

Naming a beneficiary or beneficiaries helps ensure your assets will quickly and efficiently go to provide for family members or support favorite causes. When you name a beneficiary to your 401(k), that person or entity acquires a partial right of ownership to the account. On your death, that partial right becomes full ownership.

This process generally happens automatically on your death. One possible exception occurs when you name a beneficiary other than your spouse. In that case, some plans may require a letter of approval from your spouse before another beneficiary can take control of the account.

A beneficiary has a strong position when it comes to taking control of assets naming that person as beneficiary. For instance, if your will directs an asset to one person while the asset account lists another person as beneficiary, the account goes to the one named on the account, not the one named in the will.

You can name multiple beneficiaries, splitting assets in the accounts in any way you like. You can also name backup beneficiaries in case the person or persons named aren’t able or willing to take control of the 401(k). It’s a good idea to review the beneficiaries you have named from time to time or after major life events such as marriage, divorce or birth of a child, and possibly update them. Otherwise, you run the risk of someone such as an ex-spouse receiving assets you would rather direct elsewhere.

401(k) Without Beneficiaries

If you don’t name anyone as beneficiary to your 401(k), what happens to the assets in the account is determined by the rules on default beneficiaries set out in the documents controlling your retirement plan. These vary depending on the plan, but usually the spouse is the first default beneficiary, followed by any children and, finally, your estate.

If the default beneficiary comes into play, the process is different than if you had named a beneficiary. A named beneficiary gains control of the 401(k) automatically on your death without any delay or cost. However, a default beneficiary can take ownership of the account it generally will have to go through probate.

Probate is an estate-settlement process governed by state laws that vary widely. Sometimes probate can take years to complete and require paying significant fees and other costs. While this is going on, assets in your estate may be frozen so your surviving family members can’t access them.

A person named as beneficiary to your 401(k) may, at their option, be able to roll over the assets in to an IRA. This can help reduce taxes, among other advantages. However, if you don’t name a beneficiary and the plan directs the assets to a default beneficiary, a rollover may not be possible. That can lead the default beneficiary to have to pay more taxes on the transfer than otherwise.

Bottom Line

If you don’t name a beneficiary for your 401(k) plan, your plan’s rules will likely direct the assets to a default beneficiary, such as your spouse or children. Before a default beneficiary can gain control of the account, however, it will likely have to go through probate, adding time and cost to the process of settling your estate. You can avoid this by naming one or more beneficiaries, as well as backup beneficiaries, either when you establish the account or later on.

Retirement Tips for Beginners

  • You can get help saving for retirement from a financial advisor. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s Retirement Calculator can help you turn a few data points including your location, age, income, current savings and amount and frequency of future contributions, into a forecast of how much money you’ll have when you are ready to retire.

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Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.

Source: smartasset.com

Apache is functioning normally

Apache is functioning normally

Annuities can help solve the biggest challenge of retirement.

When you save up for retirement, the two largest risks are intertwined. First, you risk not being able to pay your bills if you don’t properly calculate your annual spending. Second, you risk running out of money late in life if you don’t properly anticipate your lifespan.

A financial advisor can help you calculate how much retirement income you’ll need to generate once you stop working. Find an advisor today. 

To help address these issues in tandem, insurance companies sell a product called fixed-index annuities or FIAs. These are designed to provide a baseline of growth-oriented income for the rest of your life. But, as Morningstar researchers recently pointed out, FIAs only work if you use them properly. Otherwise, they turn into money losers compared with more standard options such as fixed-income annuities or index fund portfolios.

What Is a Fixed-Index Annuity?

A fixed-index annuity is a contract you make with an insurance company. In exchange for money upfront the company will give you structured payments over time. Some contracts specify a duration for these payments, making them each month for 10 or 20 years, for example. More often people buy retirement assets called “lifetime annuities,” which start payments when you retire and continue for the rest of your life.

Fixed-income annuities make this payment based on a guarantee. When you buy the contract, the company agrees up front to a certain monthly payment. For example, you might buy a contract for $2,500 per month for the rest of your life beginning in retirement.

A fixed-index annuity is less determined. These contracts guarantee payment, but the amount is not static. Instead, the payments are based on the performance of an underlying index such as the S&P 500 or the Russell 2000. You cannot lose the underlying principal in your contract, and most will come with a guaranteed minimum monthly payment. Otherwise, your income from a fixed-index annuity will increase or decrease based on the performance of its index.

This makes fixed-index annuities a risk/reward tradeoff. If the index does well, this product can pay significantly more than fixed-income annuities, and can even act as a hedge against inflation. If the underlying index does poorly, however, you can potentially make much less money in the long run. This risk is significantly mitigated if you invest in a mainstream index like the S&P 500, but is not trivial if you invest in a higher-risk field.

The Key To Fixed-Index Annuities Is Proper Use

Risk and reward is a very delicate balance in retirement. On the one hand, you want your money to keep growing during these years. On the other hand, you don’t have new income to replace losses, so you want your money to remain safe.

Recently, Morningstar examined where fixed-index annuities fall in that balance. They compared the overall performance of an FIA with a guaranteed lifetime withdrawal benefit rider (GLWB) against standard fixed-income annuities and portfolio investments.

“Overall,” wrote analyst Spencer Look, “I found that FIAs with a GLWB improve projected retirement outcomes, but only if they are used properly.” Specifically, this product can result in stronger payments, fewer shortfalls and more money left over in your estate for the right investor.

But what constitutes proper use? Morningstar found two critical elements:

1. Early Investment

More than anything else, Look found that investors need to buy their FIA at least 10 years before they begin to make withdrawals. For a typical retiree, this means investing by or before age 55.

Why? The annuity needs time to grow. The more time the index has for cumulative growth, the more it will pay. Investors who need income more quickly than this typically see better results with single premium immediate annuities, meaning a fixed-income annuity that you purchase with a lump-sum upfront.

2. Lifetime Investment

This asset also is best for retirees who will hold it throughout their lives.

Exiting an annuity early is known as “lapsing.” When that happens, you collect back the money you put in (often minus a penalty fee) and the contract stops making payments.

Much of the reason to buy this product is that it makes payments for the rest of your life. Over those years and decades, Morningstar found that you will often make more money with an FIA than if you had invested in a fixed-income annuity or a simple stock portfolio.

But if you exit early, you miss out on those future gains. In this case, you often make less money overall than if you had invested in a lump-sum annuity or a stock portfolio.

Longevity Risk Protection

In particular, Morningstar found that a fixed-index annuity can help protect people from running out of money in retirement. “This is because,” wrote Look in his analysis, “an FIA with a GLWB is an insurance product that mitigates against market risk and longevity risk.”

Retirement savers who put their money into portfolios, such as stocks, bonds or index funds, can often get stronger growth than with more careful products like an annuity. But that money is finite, so they risk running out of it.

A fixed-index annuity offers a best-of-both-worlds approach. While FIAs don’t give the full return of their underlying index, they do tend to post stronger returns than a standard fixed-income annuity. Yet, they also come with lifetime payments and a minimum benefit guarantee, mitigating the risk of running out of cash in old age.

Bottom Line

Based on Morningstar’s analysis, investors who are looking for a lifetime retirement product should consider fixed-index annuities. They can offer a strong middle ground between the lower-return/higher-security of a fixed-income annuity and the higher-return/lower-security of a portfolio, but only if you use them correctly. Exiting the contract early can decrease or eliminate the benefits altogether.

Annuity Investing Tips

  • Annuities can be a strong product for the right investor, but they can often seem complicated. Don’t sweat it. With our step-by-step guide, you can learn the fundamentals of annuities so you can feel more confident about these financial products.
  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

Source: smartasset.com