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Here are answers to some frequently asked questions regarding IRAs and other retirement plans, non-retirement accounts, trusts, and tax considerations.
Retirement Plan Questions
What are the differences between the various types of retirement plans?
Whether you are just starting to save for retirement or looking for another vehicle to help maximize your retirement savings, there is a range of retirement plans that can help meet your needs. This 2021 retirement reference guide outlines the key considerations.
Non-Retirement Account Questions
What are non-retirement accounts and how do they work?
Non-retirement accounts can come in many forms, but the most common is a taxable brokerage account. You can generally deposit and withdraw money from these accounts without any limitations or penalties unless they are imposed by your brokerage firm or a specific investment. You don't have to roll over these accounts because they have no special tax benefits.
Now are the taxation considerations for non-retirement accounts?
Brokerage accounts are taxed depending on the type of transaction within the account. Whenever you receive taxable distributions from an investment, you pay a tax on them during that tax year. Qualified dividends and capital gains are taxed at more favorable long-term capital gains tax rates.
You also pay taxes when you sell an investment at a gain. Gains on investments held for more than one year typically qualify for more favorable long-term capital gains tax rates. Gains on investments held less than a year are typically taxed at your ordinary income tax rate. Losses on investments can offset investment gains, which may lessen your tax burden.
What is a transfer on death (TOD) designation and how does it work?
The transfer on death designation lets beneficiaries receive assets at the time of the person's death without going through probate. With TOD registration, the named beneficiaries have no access to or control over a person's assets as long as the person is alive.
A TOD account automatically transfers its assets to a named beneficiary when the holder dies. For example, if you have a savings account with $100,000 in it and name your son as its beneficiary, that account would transfer to him upon your death.
What Is a custodial account and how does it work?
A custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities.
What is the difference between a revocable trust and an irrevocable trust?
A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An irrevocable trust describes a trust that cannot be modified after it is created without the consent of the beneficiaries.
When it comes to the protection of assets, an irrevocable trust may be better than a revocable trust. Again, the reason for this is that if the trust is revocable, an individual who created the trust retains complete control over all trust assets.
Does a trust have to go through probate?
No, that is one of the benefits of a trust over a will. A will is a written document expressing a deceased person's wishes, from naming guardians of minor children to bequeathing objects and cash assets to friends, relatives, or charities. A will becomes active only after one's death.
A trust is active the day you create it, and a grantor may list the distribution of assets before their death in it, unlike a will. There are irrevocable trusts, often created for tax purposes, which cannot be altered after their creation, and living trusts, which can be changed by the grantor.
All wills must go through a legal process called probate, where an authorized court administrator examines them. This process can be lengthy and potentially contentious if family members contest the will. Trusts are not required to go through probate when the grantor dies, and they cannot be contested.
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