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15. Retirement and Estate Planning. 15.1 Planning for Retirement 15.2 Saving for Retirement. Lesson 15.1 Planning for Retirement. GOALS Describe retirement needs for most individuals and families. Discuss estate planning documents and methods to minimize taxes on estates. Chapter 15.

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retirement and estate planning


Retirement andEstate Planning

15.1 Planning for Retirement

15.2 Saving for Retirement

lesson 15 1 planning for retirement
Lesson 15.1Planning for Retirement


  • Describe retirement needs for most individuals and families.
  • Discuss estate planning documents and methods to minimize taxes on estates.
  • Chapter 15
retirement needs
Retirement Needs
  • How much income do you need?
  • Keep the house or move?
  • What type of investment strategy?
  • How much insurance?
  • How do you beat inflation?
  • Chapter 15
reverse mortgage
Reverse Mortgage
  • A reverse mortgage is a loan against the equity in the borrower’s home.
  • The lender makes tax-free monthly payments to the borrower.
  • It works the opposite of a mortgage. Instead of making payments to the lender, the lender pays you.
  • Chapter 15
  • An heir is a person who will inherit property from someone who dies.
  • Typically, heirs are spouses and children.
  • Chapter 15
estate planning
Estate Planning
  • An estate is all that a person owns, less debts owed, at the time of the person’s death.
  • Estate planning involves preparing a plan for transferring property during one’s lifetime and at one’s death.
  • Goals in estate planning
    • Minimize taxes on the estate
    • Make known how you want your possessions distributed
    • Provide for a smooth transfer of your possessions upon your death
  • Chapter 15
estate planning tools
Estate Planning Tools
  • Wills
  • Trusts
  • Joint ownership
  • Power of attorney
  • Chapter 15
  • A will, or testament is a legal document that tells how an estate is to be distributed when a person dies.
  • In your will, you name an executor (also called a personal representative) to carry out your wishes when you die.
  • Any person who is 18 or older and of sound mind can make a legally valid will.
  • The person who makes the will is called the testator.
  • Chapter 15
simple will
Simple Will
  • A simple will is a short document that lists the people whom you want to be your heirs and what you want each to receive.
  • Simple wills take a short time to prepare, and they are fairly standard documents.
  • If your estate is relatively uncomplicated, you can prepare a will yourself, using an inexpensive kit or software purchased online or at an office products or software store.
  • Whether or not you use a lawyer, you will need witnesses to your signature.
  • Chapter 15
holographic will
Holographic Will
  • A holographic will is written in a person’s own handwriting.
  • A handwritten will is legally valid in 19 states and should be witnessed, like other wills.
  • Because a handwritten will is often easier to contest (question), a typed will is better.
  • Chapter 15
  • When people die without a will, they are said to be intestate.
  • In that event, the person’s property is distributed according to the laws of the state where the decedent died.
  • By having a valid will, you can control who gets what.
  • Property reverts to the state when a person dies without heirs.
  • Chapter 15
  • A codicil is a legal document that modifies parts of a will and reaffirms the rest.
  • A will cannot be legally amended by crossing out or adding words, by removing or adding pages, or by making erasures.
  • A codicil is drawn by an attorney and is executed and witnessed the same as a will.
  • Chapter 15
  • A trust is a legal document in which an individual (the trustor) gives someone else (the trustee) control of property, for ultimate distribution to another person (the beneficiary).
  • The trustee may be a financial institution or a person.
  • Types of trust:
    • Inter vivos, or a “living” trust
    • Testamentary trust
  • Chapter 15
joint ownership
Joint Ownership
  • Joint tenants with right of survivorship (JTWROS)
    • The ownership is split 50-50 for estate tax purposes
    • No legal action is necessary to transfer title
    • Commonly used for land, automobiles, residences, bank accounts, and securities
  • Joint tenants without right of survivorship
    • When one person dies, his or her interest in the property passes to his or her heirs, not to the remaining owners.
  • Joint ownership is an effective way to avoid probate and inheritance taxes in some states.
  • Chapter 15
power of attorney
Power of Attorney
  • A power of attorney is a legal document authorizing someone to act on your behalf.
  • The power of attorney may be limited or general in time or in scope.
  • Chapter 15
taxation of estates
Taxation of Estates
  • Federal and state governments levy various types of taxes that must be considered in planning your estate:
    • Federal estate taxes
    • State death taxes
    • Federal gift taxes
    • Federal/state income taxes
  • Chapter 15
federal estate taxes
Federal Estate Taxes
  • The federal government levies an estate tax, which is a tax on property transferred from an estate to its heirs.
  • An estate must be worth more than a certain amount ($3.5 million in 2009) to be subject to this tax.
  • The federal estate tax is scheduled to be removed completely in 2010.
  • The estate tax is paid from the assets of the estate, before anything can be distributed to heirs.
  • Chapter 15
state death taxes
State Death Taxes
  • The state inheritance tax is imposed on an heir who inherits property from an estate.
  • The difference between an estate tax and an inheritance tax lies in who pays the tax.
    • The estate tax is deducted from the value of the estate before distribution to heirs
    • Heirs pay inheritance taxes on property received.
  • In states where inheritance taxes are imposed, laws vary widely as to the rate of taxation and the treatment of property to be taxed.
  • Chapter 15
federal gift taxes
Federal Gift Taxes
  • A gift tax is applied to a gift of money or property.
  • It is paid by the giver, not the receiver, of the gift.
  • In 2008, you could have given up to $12,000 per person per year without having to pay a gift tax.
  • Chapter 15
federal state income taxes
Federal/State Income Taxes
  • When someone dies, income taxes must be paid on the income the decedent earned that year and on any income earned by the estate while its assets remain undistributed (such as interest or dividends).
  • Chapter 15
lesson 15 2 saving for retirement
Lesson 15.2Saving for Retirement


  • Discuss features and types of personal retirement plans.
  • Discuss features and types of employer-sponsored retirement plans.
  • Explain basic benefits available through government-sponsored plans.
  • Chapter 15
personal retirement accounts
Personal Retirement Accounts
  • Individual retirement accounts (IRAs)
  • Keogh plans
  • Simplified employee pension (SEP) plans
  • Annuities
  • Pre-taxed savings
  • Chapter 15
individual retirement accounts iras
Individual Retirement Accounts (IRAs)
  • An individual retirement account (IRA) is a retirement savings plan that allows individuals to set aside up to a specified amount each year and delay paying tax on the earnings until they begin withdrawing it at age 59½ or later.
  • With a traditional IRA, you can deduct your contribution each year from your taxable income.
  • A Roth IRA is a type of IRA where contributions are taxed, but earnings are not.
  • Chapter 15
keogh plans
Keogh Plans
  • A Keogh plan is a tax-deferred retirement savings plan available to self-employed individuals and their employees.
  • The amounts an employer contributes are fully tax deductible.
  • Earnings on Keogh plans are also tax-deferred.
  • Chapter 15
simplified employee pension sep
Simplified Employee Pension (SEP)
  • A Simplified Employee Pension (SEP) plan is a tax-deferred retirement plan available to small businesses.
  • Each employee sets up an IRA at a financial institution.
    • Employer makes an annual tax-deductible contribution of up to 25 percent of the employee’s salary or $46,000 (in 2008), whichever is less.
    • Employees also can make contributions up to a $2,000 limit.
  • Chapter 15
  • An annuity is income from an investment paid in a series of regular payments made for a set number of years.
  • Annuities are usually provided through insurance companies.
  • Tax-sheltered annuities can be used to save for retirement.
  • Chapter 15
pretaxed savings
Pretaxed Savings
  • Not all of your retirement savings should be in tax-deferred plans.
  • Some should be savings and investments made with pretaxed income.
  • You will be able to withdraw these funds at any time, without tax consequences.
  • Chapter 15
employer sponsored retirement plans
Employer-SponsoredRetirement Plans
  • Another source of retirement income may be the retirement plan offered by your company.
  • With employer-sponsored plans, you and often your employer contribute to your tax-sheltered retirement savings.
  • Contributions and earnings on employer-sponsored plans accumulate tax-free until you receive them.
  • Chapter 15
defined benefit plans
Defined-Benefit Plans
  • A defined-benefit plan is a company-sponsored retirement plan in which retired employees receive a set monthly amount based on wages earned and number of years of service.
  • The employer may make the entire contribution to the plan.
  • To become vested, or entitled to the full amount in the plan, you may have to work for the company for a specified number of years.
  • Chapter 15
defined contribution plans
Defined-Contribution Plans
  • A defined-contribution plan is a company-sponsored retirement plan in which employees can receive a periodic or lump-sum payment based on their account balance and the performance of the investments in their account.
  • These contributions are often tax-deferred (not taxed until withdrawn at retirement).
  • The employer may or may not contribute to the employee’s account as well.
  • Chapter 15
401 k plans
401(k) Plans
  • A 401(k) plan is a defined-contribution plan for employees of companies that operate for a profit.
  • Characteristics
    • Employees contribute a percentage of wages or salary
    • Payroll deduction
    • Investment choices
    • Matching contribution
  • Chapter 15
403 b plans
403(b) Plans
  • A 403(b) plan is a defined-contribution plan for employees of schools, nonprofit organizations, and government units.
  • While the rules may vary slightly, the 403(b) plan operates like a 401(k).
  • Chapter 15
government sponsored pension plans
Government-SponsoredPension Plans
  • Social Security
  • Military benefits
  • Chapter 15