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Fiscal Fitness - What are you waiting for?

Welcome to the latest edition of Fiscal Fitness! Are you on the verge of retirement or about to make a major life change that will affect your financial future? To my surprise, most people wait until a major life event to occur before meeting with a professional to address their estate or retirement planning needs. Before the holidays kick in, now is the time to plan for yourself. What are you waiting for?

Do you understand your retirement plan at work?

I recently met with a man who retired as a federal employee. The Thrift Savings Plan, or TSP, is a retirement plan offered to employees of the U.S. government - it is similar to a "401(k) plan" available to many private sector employees. There is one caveat-a withdrawal deadline. If you do not withdraw (or begin withdrawing) your account by the required withdrawal deadline, your account balance will be forfeited to the TSP. You can reclaim your account, but will not receive any earnings on your account from the time the account was forfeited. The bottom line: understand any pitfalls of leaving a retirement plan at your former employer and plan accordingly. Why lose control over something that took you a lifetime to build?

Are you familiar with a new pension law for private-sector plans that becomes effective next year?

People near retirement may wish to know how the changes will affect the issues surrounding lump-sum payout option versus taking a lifetime pension. If you are close to retirement, you may want to ask your plan sponsor for an estimate of the lump sum in both the current year and for next year. Then meet with your advisor on how that could affect your longterm planning.

Are you about to receive a portion of your former spouse's retirement plan via a QDRO (qualified domestic relations order)?

If so, do you know if your ex-spouse has taken a loan from the plan? In most instances, a loan must be satisfied before any money is eligible to be transferred or dispersed. For example, if your soon to be ex-wife has a 401(k), the quarterly statement should show any loan balance due. Most do not catch this - statements can be difficult to read. If the QDRO is submitted without addressing the loan, it can hold up the transfer of funds and become costly due to new QDRO instructions. I see this all too often.

Have you updated your beneficiary information on all retirement plans, insurance policies, IRAs and annuities?

How many more times can I stress the importance of this? For example, if you have multiple beneficiaries on your IRA, each beneficiary is allowed to take distributions over his or her life expectancy and name their own beneficiaries, thus creating a "stretch" IRA. A stretch IRA opportunity is lost if you leave your beneficiary information blank or list your estate as the recipient. Although the IRA funds will get to your intended beneficiary, the entire amount can be subject to taxation, as well as pushing them into a higher tax bracket. With proper planning, this could be avoided.

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