Retirement can be an exciting time of life for a person, closing one chapter and opening a new one. However, before turning the page, it is important to put your personal and financial house in order.
Retirement Accounts
At retirement, decisions must be made about traditional and Roth accounts in 401(k) plans, 403(b) plans and other employer-sponsored qualified retirement plans. Many people choose to do a tax-free rollover of the plan balance into an IRA. However, others prefer to keep their retirement funds invested in the company plan. Review all of the options, as some employer-sponsored plans, including 401(k)s, may have limited options for beneficiary designations and investments.
In most cases, if the retiree is over age 70 and a half, he or she must take minimum distributions from the retirement plan or IRA, and can take more than the required minimum if needed or desired. For retirees who are over 59 and a half, withdrawals are not required but can be made without any additional penalty. For retirees between 55 and 59 and a half, withdrawals can be made, but only using a handful of limited pay-out options. For fortunate retirees under the age of 55, there may be penalties or restrictions on withdrawing funds from retirement plans and IRAs, and therefore those younger retirees should consider other sources of income to sustain their lifestyles.
Also be sure to designate proper beneficiaries of any retirement plan or IRA. Typically, the spouse is named as the primary beneficiary, which allows him or her to do a tax-free spousal rollover upon the death of the retiree. The choice of secondary beneficiary, or even primary beneficiary for unmarried retirees, will depend on a number of factors. Be warned, the failure to designate a proper beneficiary could result in the entire retirement account or IRA being subject to income tax within five years of the death of the retiree. Examples of improper beneficiaries would be one’s estate, minors (like grandchildren) or designating someone significantly older than you, especially if they die before you and you don’t change your beneficiary.
NH Interest and Dividends Tax
If a person retires after selling a business, the increased interest and dividend income the retiree earns, when the proceeds from the sale are reinvested, will be subject to NH’s Interest and Dividends Tax.
Since NH does not have a personal income tax on earned income and no income tax on personal capital gains, many NH residents do not pay any state income tax during their lifetime. But, interest and dividends earned from portfolios that are not held in retirement accounts are subject to the five percent Interest and Dividends Tax after personal exemptions.
Health Insurance
For retirees who retire before age 65, health insurance can be a significant concern. COBRA is the federal law that allows retirees to continue to receive their employer-sponsored health insurance once they are no longer employed. But, keep in mind, the retiree bears the entire cost of the premiums, and often the cost is significantly more than when employed. There are two reasons for this. One is because employers cover portions of the premiums and people often don’t realize that if they elect COBRA, the amount they have to pay will be much more than what was taken out of each weekly paycheck. The other reason is that when the premium is taken out of your paycheck, it is pre-tax. When you elect COBRA, you pay those premiums from after-tax dollars, which is another surprise to many. Moreover, COBRA eligibility in the event of retirement is limited to 18 months.
The Affordable Care Act has created additional options for individuals who are otherwise uninsured. However, some may find that the “affordable” options still cost significantly more than the retiree was paying while employed, and the coverage available may not be comparable to coverages available under large employer-sponsored group health insurance plans.
Medicare is another option that kicks in when you turn 65, but if you are still employed, you do not need to apply then and probably shouldn’t if you like your employer’s health insurance plan. If you retire before 65, once you reach 65, you will have a limited time to pick a Medicare option. Failure to select an option within the allotted time frame won’t prohibit you from getting Medicare, but it can cause your premiums to be higher forever. If you retire at 67, you will have that same window as if you retired at 65, and the same “penalty” could apply if you don’t pick within the designated window of time.
Estate Planning and Taxes
A final consideration is the condition of a retiree’s estate plan. For retirees who have engaged in the estate planning earlier in life, retirement generally necessitates a review of the estate plan. Naturally, retirees with no estate plan should put this project at the top of their to-do lists.
The federal estate tax exemption has jumped in recent years to more than $5 million per person, and there is no state level estate tax in NH. This means older estate plans need to be reviewed and often can be simplified and modernized. As employer-sponsored retirement plans are rolled out, lump sum deferred compensation payments are made, businesses are sold, and personal real estate is sold and new personal real estate is purchased, a comprehensive review and update of the estate plan is generally warranted.
This gives the retiree the opportunity to make sure that assets will pass to the right individuals upon his or her death, that the right individuals have been named as executor, trustee and financial power of attorney and that proper individuals have been designated to make health care decisions in the event of incapacity. The retiree should also make sure that trusts have been funded to avoid probate upon the retiree’s death, which will preserve his or her privacy and reduce the costs, hassle and time delays involved with settling the retiree’s affairs.
Anu R. Mullikin is an attorney and shareholder with Devine Millimet in Manchester and chairs the law firm’s Trust and Estates Practice Group. She can be reached at 603-695-8536 or amullikin@devinemillimet.com.
Current Issue - May 2024