Retirement Planning
In Glendale AZ

Key Components of Retirement Planning:

Income Assessment: Estimating the amount of money required for retirement, including basic living expenses, healthcare, leisure activities, and unforeseen costs.

Savings Plan: Creating a plan to save a portion of current income for retirement.

Investment Strategy: Deciding on an investment approach to grow retirement savings, considering factors like risk tolerance and time horizon.

Tax Planning: Understanding how retirement income and withdrawals will be taxed and planning accordingly.

Healthcare Planning: Considering the costs of healthcare in retirement and exploring insurance options like Medicare.

Estate Planning: Deciding how to distribute assets after death, including wills and trusts.

When Should Retirement Planning Begin?

The best time to start retirement planning is as soon as you begin earning. Starting early has several advantages:

Compounding Interest: The earlier you start saving, the more time your money has to grow through compounding interest. Lower Financial Burden: Starting early means you can save smaller amounts regularly, reducing the financial burden as you approach retirement. Adjustment Flexibility: An early start provides more time to adjust your plan if needed, whether due to changes in income, lifestyle, or unforeseen events.

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Age-specific Retirement Planning Strategies

In Your 20s and 30s: Focus on starting to save, however small the amount. Consider employer-sponsored retirement plans like 401(k)s, and start building an emergency fund.

In Your 40s: Increase your savings rate, and begin fine-tuning your investment strategy. It’s also a good time to start thinking about your desired retirement lifestyle.

In Your 50s and 60s: Maximize your retirement contributions, especially if you’re behind on your savings goals. Start planning for healthcare costs and consider long-term care insurance.

Post 60s: Fine-tune your income plans, decide on when to take Social Security benefits, and plan for required minimum distributions from retirement accounts.

Retirement planning is a dynamic process that should evolve as your financial situation and goals change over time. Starting early and staying committed to your plan is key to a comfortable and secure retirement. Remember, it’s not just about saving money but also about preparing for a new phase of life with its unique challenges and opportunities

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Key Components of Tax Planning For Retirement

Years ago, when tax laws were less favorable, a middle-class couple seeking legal counsel for estate planning would have focused on avoiding estate taxes. Estate tax was a priority because a couple with assets over $1,500,000 could have faced federal estate taxes at a rate between 45-47%. With such a hefty estate tax rate on assets over $1,500,000, it made sense to carefully plan for estate taxes.

Today, planning to avoid estate taxes is much less important for most people. The federal estate tax exemption is $12,920,000 per taxpayer, indexed to inflation. This means that in 2023, each person can transfer $12,920,000 before the estate tax kicks in, and a married couple can shelter double that amount. With this high exemption, avoiding estate taxes has become unnecessary for the vast majority of Americans. However, be aware that the current law is set to expire in 2026, and the exemption is scheduled to revert to $5,000,000.

The favorable change in estate tax laws does not mean that tax planning should be ignored. Instead, the focus has shifted to income tax planning, specifically basis planning. Ignoring basis planning may result in unpleasant surprises when disposing of an asset.

The Basics of Basis

Basis is a crucial income tax concept used to determine the taxable income when disposing of an asset. The taxable income realized equals the difference between the value received for the asset and your basis in the asset. Your basis in a particular asset will be determined under one of three rules, depending on how you acquire the asset:

• Purchased Assets: For assets acquired by purchase, your basis is your investment in that asset, typically the amount paid for the asset. This is known as "cost basis."
• Gifts: For assets acquired by gift, your basis is generally equal to the donor's basis in the property, known as "carry over basis."
• Inherited Assets: For inherited assets, your basis is generally reset to the fair market value of the property on the date of the person's death, known as "stepped up basis." However, a "stepped down basis" could result if the asset depreciated in value.

Effective estate planning seeks to maximize your and your heirs' basis in an asset prior to its anticipated sale date.

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Age-Specific Disability Planning Strategies

Disability planning is crucial at any age, but specific strategies can be tailored to different life stages:

• Young Adults: Establish durable powers of attorney and health care proxies to ensure that someone can make decisions on your behalf if you become incapacitated.
• Middle Age: Review and update beneficiary designations, and consider long-term care insurance to protect against future health care costs.
• Retirees: Ensure that your estate plan includes provisions for potential disability, such as revocable living trusts that can manage your assets if you become unable to do so.

Planning Considerations

Individual Asset Analysis

Basis planning requires examining each asset individually. Consider the expected future appreciation and anticipated timeline for disposing of the asset. Be aware that tax rates on income realized when an asset is sold can vary based on the asset type. The rules for determining basis can also vary based on the asset type. Therefore, there is no uniform rule of thumb for basis planning; individual circumstances must be reviewed asset by asset.

Lifetime Gifts of Depreciated Property

If you own an asset that has depreciated in value and do not anticipate selling it during your lifetime, consider making a gift of the asset to preserve a higher basis. Gifting the asset allows the recipient to take your basis in the asset. If the asset appreciates, the recipient can sell it and use your basis in computing the taxable income. In contrast, holding the asset until death means the recipient's basis will be the fair market value at your death. If the asset subsequently appreciates and is sold, the recipient's taxable income will be higher than if you gifted the asset during your lifetime.

Holding Appreciated Property until Death

If you own an asset that has appreciated in value, consider holding it until death so your heirs receive a "stepped up basis." This allows your heirs to sell the asset immediately without incurring income tax on the sale proceeds. In contrast, selling the asset during your lifetime or gifting it means you or the recipient will realize taxable income. If you hold an asset until death, your heirs should consider obtaining an appraisal to document the fair market value at your death, substantiating their basis in the asset if it is sold later.

Reevaluating Assets Held in Trust

Married couples often have estate plans that establish a trust for the surviving spouse upon the first spouse's death. Such trusts, known as "credit shelter trusts" or "family trusts," are structured to exclude the trust's assets from the surviving spouse's taxable estate. Under prior law, these trusts provided significant estate tax savings. However, under current law, these trusts often increase income tax liability for the trusts and their beneficiaries. This is because the trust's assets are not included in the surviving spouse's taxable estate, preventing a "stepped up basis" upon the surviving spouse's death.

Couples with estate plans prepared under prior law should reevaluate their plans to ensure tax efficiency. Beneficiaries of credit shelter trusts or family trusts should discuss with their advisors whether the trusts are structured for income tax efficiency and explore opportunities to remedy any issues.

Final Words on Tax Planning For Retirement in Arizona

Estate planning is an evolving art that requires adjustments over time. In light of tax law changes, the focus has shifted from estate tax planning to income tax planning. Anyone with an estate plan prepared under prior law or a beneficiary of a trust established under prior law should reevaluate their plans to ensure continued tax efficiency.

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