Family Changes

Share your ideal retirement with each other. You might be surprised to find they are different. One of you may be happy to work forever while the other one wants to retire at 50. You may dream of a loft in the city while your spouse pictures hitting the road in a motor home. The sooner you are aware of the other's goal, the more time you have to work toward a compromise and a plan.

Does your spouse have a 401(k)? If not, can you add more pre-tax income to your own plan to meet your mutual goals? If one spouse is not employed, you may want to consider a Spousal IRA. This allows you to put aside funds in a tax-deferred investment account for the benefit of an unemployed spouse.

What are your shared income needs? You may think you could make a retirement budget work with half of your current income, but your spouse may want to keep the same lifestyle you enjoy today, which could require the same level of income you earn today. Align your expectations to build a more realistic plan.

By timing your individual and spousal claims in just the right way, you can maximize your lifetime social security income. It all depends on you, your age, the age of your claim and your spouse, but some planning in the years before age 62 can make a difference in your social security income for life.

Changing beneficiaries on your 401(k) is easy. And it’s often necessary after major life events such as a marriage, the birth of a child, a divorce, or a family death. Make sure yours are up to date.

IRAs are divided using a process known as "transfer incident to divorce." 403(b) and qualified plans, such as a 401(k), are split under the "Qualified Domestic Relations Order" (QDRO). Even if you are dividing the assets in your IRAs and qualified plans in exactly the same manner, you should delineate clearly the category into which each of your retirement assets falls when you submit your information to the judge or mediator. Doing so will help ensure they are listed correctly in the divorce or separation agreement (many courts will lump them all under QRDOs which can cause substantial problems in the future).

Specify that your IRA division is to be treated as a transfer incident to divorce in your agreement and no tax will be assessed on the separation transaction. Depending on the circumstances of the division and how the decree is worded, the movement of funds may be classified as either a transfer or a rollover by the IRA custodian. Either way, the recipient will take legal ownership of the assets when the transfer is complete and then assume sole responsibility for the tax consequences of any future transactions or distributions.

This is important. It means that if you are giving half of your IRA to your soon-to-be-ex in the form of a properly labeled transfer incident, your ex will have to pay the tax on any distributions they take out of the account after they receives the funds. You will not owe tax on the assets that were sent to your ex because you followed the IRS rules for transfer incidents. Fail to adequately label your division, though, and you will owe both tax and an early withdrawal penalty, if applicable, on the entire amount that your ex-spouse received.

You can avoid this by clearly listing both the division percentage breakdown and the dollar amount of IRA assets being transferred, as well as all the sending and receiving account numbers for all of the IRAs involved in the transfer.

It’s important to understand that the instructions you provide must satisfy both the sending and receiving IRA custodians, as well as the judge and state laws. If the division agreement is not approved by the courts, the IRS will require you to file an amended tax return that reports the entire amount you sent to your ex as ordinary income. In addition, the balance your ex received cannot be placed in an IRA because it was not an eligible transfer. They will then lose the benefit of tax deferral on that money and possibly sue you to be compensated for that loss.

Has the IRA involved in the transfer incident been partially funded with nondeductible contributions? If so, both you and your ex will need to know the dollar amount of nondeductible contributions and file tax Form 8606 with the IRS in order to correctly calculate and report the apportionment of the nondeductible amounts. Sound tricky? It is. We recommend seeking professional help from your tax advisor in getting this form filed for both of you so you don’t pay unnecessary taxes on IRA distributions that came from contributions that were never deducted.

There are few exceptions to the protections from seizure or attachment by creditors or lawsuits that federal law accords to qualified retirement plans. Divorce is one of them. Divorce and separation decrees allow the attachment of qualified-plan assets by the ex-spouse of the plan owner if the spouse uses a Qualified Domestic Relations Order. This decree is used to divide qualified retirement-plan assets between the owner and their current or ex-spouse or child or other dependent.

QDROs are tax-free transactions as long as they have been reported correctly to the courts and the IRA custodians. The receiving spouse may roll QDRO assets into their own qualified plan or into a traditional or Roth IRA (in which case the transfer will be taxed as a conversion but not penalized). Any transfer from a qualified plan pursuant to a divorce settlement that is not deemed a QDRO by the IRS is subject to tax and penalty.

Be sure to add or update your beneficiaries after you send or receive your IRA or qualified-plan assets. It would be wise to update the beneficiaries on all your other financial assets (annuities, life insurance, etc.) as well. If you are going to get remarried and/or your children are now going to be your primary beneficiaries, consider creating a revocable living trust and make the trust the primary or secondary beneficiary of your plan or account.

Finances can be a source of friction in even the strongest relationships. Determine in advance who will pay the bills and how they'll get paid. You may want to keep separate accounts; you may want to merge them. As long as you both agree that the arrangement is fair, that’s what you should do. Consider putting your agreement in writing. This may seem cold, but it will help establish a process for making sure the agreement becomes a habit for each of you.

Not clothes, but saving, spending and investing. If there are dramatic differences, decide now where you can and can't afford to compromise. Need help? Try "what if" scenarios where you ask your partner things like whether he or she would rather pay down debt or take a vacation or how much he or she would be willing to spend on a large purchase like a new vehicle.

Once those goals are in place, then you can make a plan to achieve them. This can be harder than you think. Don’t hesitate to consult with a professional financial advisor who can provide an objective opinion.

New living arrangements may change a parent's ability to claim a child as a dependent. Follow IRS rules and agree on who provides the primary support for each child.

As a blended family, you now have choices in deciding how assets will be distributed after you or your spouse pass away. Be sure to review beneficiary designations for personal savings, investment accounts, workplace retirement accounts, and life insurance policies. You don’t want to forget, only to find out his or her ex-spouse is still the beneficiary in your time of grief.

Go in with open eyes, making sure you are protecting yourself and your loved ones. Consider opening an emergency savings account with regular, automatic contributions.

These popular college savings plans operate similar to IRA and 401(k) plans, allowing parents to save for a child's education tax-free through a variety of investment options. Savings in a 529 plan belong to the parent, not the child, and thus do not fall into the trap of sizeable savings in the child’s name working against them when it comes to financial aid. These savings can be used for undergraduate or graduate studies at any accredited two- or four-year campus in the United States. The gains on these accounts are tax-deferred, and once the funds are used to pay for qualified tuition expenses, parents will never pay taxes on those funds.

Alongside the advantage 529 savings plans offer come some restrictions as well. According to the U.S. Securities and Exchange Commission website, 529 college savings funds can be withdrawn tax-free only for qualified education expenses, including tuition, books, fees, supplies, and room and board. Money spent on unqualified expenses is subject to income tax and a 10% penalty on earnings.

Designed for parents who are sure their child will attend an in-state public university, prepaid 529 plans (also called prepaid tuition plans) allow parents to simply pay for tuition credits in advance at a predetermined price. Prepaid 529 plans offer the same tax, financial aid and parental protections as 529 college savings plans, but without being subject to swings in the stock market. The major limitation to a prepaid plan is losing out on the current value of tuition if the child decides to go to an out of state institution. You may have paid $12,000 for a year of education that’s now valued at $20,000. But if your child decides to go to school out of state, you won’t get the full $20,000 return to use for that tuition. Like the 529 college savings plans, prepaid plan holders can change beneficiaries at any time, but must pay a 10% penalty plus income tax on funds used for anything other than college tuition.

If your child doesn’t plan to attend college, they are not at risk of losing financial aid. Still, some early planning could benefit them greatly. For instance, UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) custodial accounts offer tax breaks for children under 18. According to the IRS, the first $1,000 in gains is tax-free, the second $1,000 is taxed at the child's income tax rate, and the remainder is taxed at the parent's income tax rate. There are no restrictions on how the funds may be used as long as they directly benefit the child. With a UGMA or UTMA account, parents have less control over how the child eventually spends the money.

Once your child begins earning income, you can open a Roth IRA in their name. If your child is over the age of 18, they will retain control of the account, but restrictions on Roth IRA withdrawals will keep them from taking earnings out penalty-free until the age of 59 ½. Of course, there are exceptions to that rule (hardships such as a disability or specific spending such as purchasing a first home or for qualified education expenses). Unlike a trust in a child’s name, Roth IRA’s don’t come with the legal and administrative fees.

Wait out the urge for six months to a year. Don’t sell the house, give everything to your children, buy more insurance, or sell your stocks and bonds. These things will have major consequences for you long-term, and you don’t want to do them in the emotion of the moment.

While you should postpone major financial decisions, you should immediately assess your expenses and income. Make a list of your income sources (Social Security, pension payments, dividends, interest, job earnings and IRA distributions) and your fixed expenses (groceries, mortgage payments, utilities and insurance). Check the checkbook (yours and your spouse’s) to identify recurring payments on credits cards. Remember, some income will decline as will some expenses. You just need to be prepared.

Gather Social Security numbers, birth and marriage certificates, military discharge papers, company benefits booklets, car titles, powers of attorney, and current statements for bank, brokerage and retirement accounts. Get 10 to 25 copies of your spouse's death certificate (the funeral director can help with this) as many financial institutions require a death certificate to close an account or to change ownership of investments. You'll also need the death certificate to transfer title on real estate and to claim life insurance and veterans benefits.

Don’t forget to pay your bills for credit cards, utilities, car loans, property tax, insurance premiums, and the mortgage. You don’t need the hassle of late charges. If this happens, however, don’t hesitate to ask for a waiver due to the circumstances.

Let Medicare and other health insurance companies know that your spouse has passed away and that you will no longer pay your spouse's premiums. Don’t forget to cancel club memberships and magazine subscriptions that you don't need.

Check your life insurance policy or talk to your agent. Go through checkbook registers and canceled checks to see if there were any checks written to an insurance company. Look to see if your spouse had a group policy through an employer or former employer or professional or fraternal organizations. When you file a claim, read the fine print on how you will receive the money. If the insurance company wants to place your funds into its own money-market funds and send you a checkbook turn them down. Instead, place the money in a federally insured bank account or a money-market fund.

As long as you wait until full retirement to collect, you are entitled to a survivor benefit that is equal to 100% of the deceased spouse's benefit. You can collect a survivor benefit as early as 60, but your benefit will be permanently reduced a bit for each month you claim before your full retirement age. (It's reduced by 28.5% if you claim at 60). If you were collecting a spousal benefit, you can "step up" to a survivor benefit and the spousal benefit will disappear. If you are younger than full retirement age and decide to wait to claim the full survivor benefit, you will stop receiving the spousal benefit. If your spouse dies before claiming a benefit, you will be eligible for a survivor benefit equal to the benefit he or she was entitled to at the time of his or her death.

If you are the only beneficiary of your spouse's IRA, you can roll the retirement plan into your own IRA tax-free. If your spouse was 70 ½ or older, make sure they took their required minimum distribution before they died. If they didn't, you must take their RMD by December 31 in the year they died or pay a penalty. After you've rolled the plan into your own IRA, you can skip distributions until you're 70 ½, allowing the account to grow tax-free. Once you turn 70 ½, your required distributions will be based on your life expectancy. If you are younger than 59 ½ and need to access the cash, you could consider not rolling over the IRA. By leaving the account in your spouse's name and remaining as a "beneficiary," you won’t pay a 10% penalty on any withdrawals. Then, after you turn 59 ½, you can roll the account into your own. If your spouse left you a Roth IRA, you can claim the Roth IRA as your own, in which case distributions are never required during your lifetime.

Was your spouse was employed at the time of his or her death? If so, call the benefits administrator to ask about benefits due to you. In addition to life insurance, these can include unpaid salary and bonuses, accrued vacation and sick pay, leftover funds in a medical flexible spending account, and stock options.

If your spouse was retired and you were both receiving monthly pension benefits in the form of a joint and survivor annuity, notify the plan administrator immediately. Depending on the type of annuity, you could be due 50%, 75% or 100% of what both of you were receiving before your spouse died.

If your spouse had a 401(k), ask your estate lawyer about rolling the account into an IRA. If your spouse still had accounts from former employers, consolidating them into one IRA may be helpful. Note that the 401(k)-to-IRA rollover can be complicated. Ask the 401(k) administrator to make a direct transfer to the IRA. If the plan instead sends you a check, get it into the IRA within 60 days. If you miss the 60-day cutoff, the IRS will consider the money to be a withdrawal and you will pay tax on the entire amount.

If you were receiving health coverage under your spouse's employer plan, you may be able to continue on the group plan for 36 months through COBRA coverage. Ask the plan administrator if the company will continue picking up the employer's premium subsidy.

Hold off on placing your spouse's assets in your own name until you meet with your estate lawyer. They will tell you that if you touch assets in your spouse's name, you'll lose any opportunity to "disclaim" the property (allowing those assets to go directly to your children or other heirs). If you forgo these assets, they will not count against your federal or state estate-tax exemption when you die.

You have nine months from the date of your spouse's death to file a federal estate tax return. Remember that some states have earlier deadlines for filing returns for state estate and inheritance taxes, so check with your estate attorney.

If you named your spouse to make financial and healthcare decisions on your behalf in the event you became incapacitated, you will need to designate a new agent for your financial power of attorney, healthcare power of attorney and healthcare directive.

It’s not uncommon for odd checks to arrive in your spouse’s name long after they pass away. If you close or retitle the account, there won't be a place to put them.