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Inheriting a 401K – Rules and What To Do

If you inherit a 401(k) from a spouse, parent, or loved one, itis essential to be prepared. Inheriting this type of account may be less straightforward than other types of inheritances, and comes with many considerations depending on your relationship to the account holder. 

The IRS has specific rules for spousal and non-spousal beneficiaries, all of which can affect your financial outcomes. Depending on the 401(k) type, you may owe taxes on the distributions from the inherited account. If you’re the beneficiary of a 401(k) or will be in the future, here’s what you need to know.

Key Takeaways

  • Inherited 401(k) rules have key differences between spousal and non-spousal beneficiaries. 
  • You will owe standard income taxes if you inherit a traditional 401(k).
  • You will not owe income tax if you inherit a Roth 401(k).

What is a 401(K)

A 401(k) is an employer-sponsored retirement savings plan. There are two types of 401(k) plans, traditional and Roth. With a traditional 401(k), employee contributions are pre-tax, reducing your taxable income, and taxes are paid when withdrawals are made during retirement. For Roth plans, contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.

401(k) plans can be a great asset in retirement savings and should be taken advantage of if offered by an employer. 

What are the rules when you inherit a 401(k)?

The rules for inheriting a 401(k) depend on several factors, including your relationship to the account holder, the age of the owner at their time of death, and whether or not they began taking required minimum distributions (RMDs), which start at 73. Detailed below are considerations for the most common situations.

How inheriting a 401(k) from your spouse works

If you inherit a 401(k) from a spouse, there are four options to consider: 

  • Take a lump-sum distribution. This means you can receive your portion of the 401(k) as a lump sum, without penalty. The IRS considers these distributions as regular income, which can create a significant tax bill. This is generally only a good option if the account balance is relatively small or you need immediate access to the full amount.
  • Roll the assets into your own 401(k) or IRA. This option allows you to treat the funds as if they were originally your own, consolidating your savings into one account. It also provides the opportunity for the funds to continue growing. Rollovers are subject to standard 401(k) or IRA rules, but do not incur any unique penalties. If pre-tax funds are rolled over into a Roth account, you will most likely be subject to tax penalties. It is best to consult a financial or tax advisor if you are considering a Roth rollover. This benefit is only available to spousal beneficiaries.
  • Transfer the 401(k) funds into an inherited IRA. An inherited IRA is an individual retirement account made specifically for inherited funds. This type of account allows the beneficiary to take withdrawals without facing early withdrawal penalties. It requires that you take minimum distributions, but these are based on your life expectancy, not your spouse’s. This option is helpful for spouses under 59½ who would like to make immediate withdrawals.
  • Leave the 401(k) as is. If you leave the 401(k) in its original plan, you may withdraw without triggering the 10% early withdrawal penalty. You will still pay income tax on any tax-deferred funds. If you are over 59½ and your spouse was over 73 and taking RMDs before they passed away, you may choose to continue the withdrawals or wait until you reach 73 to begin RMDs. If you are 73 or over, you must take RMDs. If you are between 59½ and 73 with a spouse who was not yet 73, you can begin taking RMDs when your spouse would have reached 73.

Options for an Inherited 401(K) if you’re a non-spouse beneficiary

Options for an inherited 401(k) vary if you are a non-spouse beneficiary. In this situation, your options are:

  • Take a lump-sum distribution. This option is the same as if you were a spouse. If you choose to take a lump sum, knowing if this distribution would push you into a higher tax bracket and being prepared is important. If the inherited 401(k) is traditional, you will owe taxes at standard income rates; if it is a Roth, you won’t owe any additional taxes on the withdrawal.
  • Transfer the 401(k) funds into an inherited IRA. Money from an inherited IRA must be fully withdrawn within 10 years, unless the beneficiary is qualified as an eligible designated beneficiary, such as a minor child or someone with a disability. If the money in the 401(k) was pre-tax, you will owe taxes on withdrawals from a traditional inherited IRA. If it is withdrawn from a Roth 401(k) or converted to a Roth IRA, taxes will not be owed, as the money was contributed post-tax. If you convert a traditional 401(k) into an inherited Roth IRA you will most likely incur taxes on the conversion.
  • Leave the 401(k) as is. You can leave the funds in the original 401(k), but as a non-spousal beneficiary, they are also typically subject to the 10-year rule.

What if the inherited 401(K) is a Roth?

If you inherit a Roth 401(k), you will not owe taxes on withdrawals, as the money was originally contributed post-tax. However, you may still be subject to the 10-year rule.

401(K) 10 Year Rule

With the passage of the SECURE Act in 2019, most non-spousal beneficiaries are required to fully distribute the inherited account within 10 years, a provision known as the 10-year rule. 

  • If the account holder died in 2020 or later, non-spousal beneficiaries must withdraw all funds by the end of the 10th year of the account holder’s passing or be subject to a 50% penalty on all remaining funds.
  • There are some exceptions for non-spousal beneficiaries inheriting accounts in or after 2020. If the beneficiary is a minor, disabled or chronically ill, or is not more than 10 years younger than the original account owner, they may take RMDs based on their life expectancy. For minor beneficiaries, the 10-year rule applies when they reach the age of maturity, as determined by their state, typically 18 (or 19 or 21 in some states). For the other categories, the 10-year rule never applies.

Bottom Line

If you inherit a 401(k), you have several choices on handling the funds within the account. These options vary in terms of rules and regulations for spousal beneficiaries versus non-spousal beneficiaries. Since these inheritances can come with significant tax liabilities, it may be helpful to consult a professional. Horizons Wealth Management financial services can assist in understanding and managing an inherited 401(k). 

401(K) Beneficiary FAQ

Do beneficiaries pay taxes on 401k (k) inheritances?

It depends on the type of 401(k) inherited. If it is a traditional 401(k), yes, as the contributions were made initially on a pre-tax basis. If it is a Roth 401(k), no, as the contributions were made with post-tax income.

How to avoid beneficiary taxes on inherited money?

There is no way to entirely avoid taxes on an inherited traditional 401(k) besides disclaiming the inheritance. You can minimize taxes paid at once by taking distributions from the original 401(k) or transferring the funds to an inherited IRA and taking distributions over 10 years.

Can I convert an inherited 401(k) to a Roth IRA?

Yes, you can convert an inherited 401(K) but you will have to pay taxes on the conversion. 

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Guide to Retirement Accounts

Planning for retirement can be daunting. According to a 2025 Gallup survey, 40% of Americans report having no money invested in a retirement savings plan, and Social Security alone cannot provide sufficient retirement income. To ensure a comfortable retirement, it is essential to understand your retirement investment options and create a personalized plan.

Key Takeaways

  • Mutual funds, index funds, target-date funds, and exchange-traded funds are all types of pooled investments frequently used in retirement accounts.
  • Investing and planning for retirement is necessary to maintain pre-retirement income.
  • Diversified funds are useful to mitigate risk.
  • A financial advisor can be a valuable resource in navigating the complexities of retirement planning.  

How Should I Save for Retirement? 

Many do not realize they must choose where their money will be invested when contributing to retirement accounts. Several types of investment funds can be held within retirement accounts. Understanding the available options is crucial to maximizing your savings.

Target Date Funds

A target-date fund is an investment option that adjusts its asset allocation over time, starting with higher-risk investments and becoming more conservative as the investor approaches retirement age. Portfolio managers employ a long-term strategy of investing the fund in riskier stocks in the early years, and shifting to more stable assets such as bonds in the later years. 

Because these funds require more oversight, they frequently come with higher fees than other passive investments. However, active management allows for a hands-off approach to retirement investing and is suitable for those who prefer not to manage their own portfolios.  

Mutual Funds

A mutual fund pools money from many investors, then invests the money in stocks, bonds, other assets and securities, or a combination of those options. The combined holdings the fund owns are known as the portfolio, and each mutual fund share represents a partial ownership of the fund’s portfolio. 

Like individual stocks or bonds, a mutual fund is a type of investment you can purchase. A retirement account is not a mutual fund itself, but the account that holds the mutual fund. There are other ways to invest in mutual funds, but doing so through retirement accounts can help alleviate your tax burden. Money contributed to retirement accounts, such as 401(k) plans and individual retirement accounts (IRAs), is most frequently invested in mutual funds. 

Index Funds

An index fund is a type of mutual fund or exchange-traded fund designed to track the performance of a market index, such as the S&P 500. Some index funds invest in all of the securities in a market index, while others invest only in a sample assortment of securities included in the market index.

ETFs

Similar to mutual funds, exchange-traded funds (ETFs) are a type of investment that pools multiple assets rather than just one, but are purchased and sold as individual products. The primary difference is that ETFs are traded throughout the day, similar to stocks, whereas mutual funds are traded once per day at market close.

ETFs are sometimes preferred due to their trading flexibility and lower fees; however, while mutual funds tend to have higher costs, they offer more in-depth professional management. ETFs can also provide more tax advantages, as investors only pay capital gains tax when selling the shares.

Why Diversifying Your Investments Matters

Diversifying your portfolio means spreading your investments across asset classes and investment types. This is done to reduce risk, as diversity across investments means you won’t incur detrimental loss due to the poor performance of an individual stock or other asset. 

Target date, mutual fund, index, and exchange-traded funds offer diversification without the need to buy and sell hundreds of individual assets. These investment options make diversification much easier for the average person since the funds are spread across hundreds or even thousands of different investments without the individual having to choose and purchase them separately. 

Without diversification, you risk losing your invested money by putting all your eggs into one basket, which could set you back significantly when planning for retirement. Some people choose to take on more risk in investments when they’re younger and shift to more conservative options as they approach retirement age.

How much should you save for retirement?

It is generally recommended to save 10-15% of your income for retirement. This amount includes employer-matched contributions and assumes a starting age of 25 and retirement age of 67. The earlier you begin saving for retirement, the lower the percentage of your annual income needed. 

For example, the recommended 15% is based on the assumption of saving and working from the ages of 25 to 67. If you did not begin saving for retirement until age 35, you would need to save around 23% of your annual income. It is also important to consider that these are just average suggestions, and the amount you need to save can differ depending on individual circumstances. 

How can a financial advisor help?

A financial advisor can help you stay on track for retirement by considering your individual needs and guiding you through important decisions, enabling you to maximize your retirement income and minimize taxes with a strategy that maintains your lifestyle. Financial advisors are particularly beneficial for individuals with complex financial situations or a high net worth.

Proper retirement planning analyzes Social Security benefits, tax-advantaged withdrawal strategies, healthcare costs, and longevity risk to ensure you can enjoy retirement without financial stress. 

Bottom Line

Knowing what to invest your retirement account contributions in can be a confusing decision. There are several types of funds, each with its own considerations. Horizons Wealth Management’s financial planning services can help you make informed decisions and develop a personalized retirement plan tailored to your goals.

Retirement Investment FAQ

What is a good monthly retirement income?

Generally, it is recommended that your retirement income be 80-100% of your pre-retirement income.

Are pooled funds required to save for retirement?

While they aren’t required, many prefer to invest in pooled funds for retirement investing as they incur less risk than putting large amounts of money in individual stocks. These funds also enable a more hands-off approach compared to the constant oversight required for personal investments. 

Is it better to have someone manage my investments?

Managing your own retirement investments can quickly become overwhelming and time-consuming. Hiring a professional can alleviate that stress and provide you with insight into options you may not have been aware of otherwise.

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What is an Index Fund and How Does it Work?

how to invest in index funds

Index funds provide investors with a low-cost way to invest their funds across a diverse subset of stocks and bonds. Used correctly, they can be a reliable part of a healthy overall investment strategy.

Key Takeaways

  • Index funds are portfolios of investments focused on a specific market or sector of a market rather than individual companies.
  • There are many different types of index funds focused on everything from company size to where the market is located to how the targeted businesses conduct their operations.
  • Generally speaking, index funds are relatively low-cost ways to passively grow your wealth.
  • While index funds are usually a way for investors to increase their wealth, those seeking faster growth or larger gains might want to supplement their investments with some actively managed funds or stock portfolios.

What is an Index Fund?

An index fund is an investment tool designed to provide consistent growth by diversifying an investor’s assets. 

Index funds are set up to provide a reasonable cross-section of a given market index in hopes that the fund’s growth will mimic the index on which it is based. Market indices, like the Dow Jones Industrial Average or the Nasdaq Composite, will fluctuate over time and as they do, index funds composed of stocks and bonds monitored by the chosen index will mirror those changes.

Common Types of Index Funds

There are a wide variety of index funds available tailored to investors’ goals and preferences. These might be organized by the types of businesses referenced by the fund, their size, or any number of other criteria that fund managers use.x

  • Broad Market – Broad market index funds cast the widest net, with the goal of the fund being to mirror all of the stocks and bonds in the chosen index as closely as possible.
  • Sector – Rather than mirroring an index like the S&P 500, sector index funds focus on a specific type of business. A healthcare index fund, for instance, would focus on investing in a diverse subset of companies in the medical field.
  • Domestic – Domestic index funds are focused on stocks and bonds related to a single country. In the United States, commonly monitored indices include the S&P 500 and the Nasdaq Composite.
  • International – International index funds provide a relatively low-risk and low-cost entry point to investing in global markets. Because index funds look at a broad swath of a market, it’s less necessary to have extremely specific knowledge of another country’s business environment before investing.
  • Bond – Not all index funds are focused on businesses and stocks. Bond index funds allow individuals to invest in the overall bond market in a given country using an index setup similar to those tracking corporate entities. One of the most popular is the Barclays Aggregate U.S. Bond Index.
  • Dividend – Dividend indices track companies that pay dividends to their investors. Rather than investing in the companies individually, investors can choose to put their money into an index fund that tracks those companies and pays out a proportional share of the dividends to its investors.

Index Fund Benefits

Index funds provide a large number of benefits to investors, including increased simplicity and lower costs. They are often lauded as simple, passive forms of wealth generation for those who invest in them.

Reduced Costs

Because index funds are set up to passively adhere to the fluctuations in a given market or sector of a market, they require less maintenance. There are fewer decisions to be made over time, and so they need fewer people managing them, bringing overhead down.

Reduced Risk

Index funds rely on diversification to provide diversified, consistent growth over time. While investing in individual companies can yield high returns, you are also at the mercy of any drastic changes at the business or in how the market views a particular entity. With a diversified set of investments provided by an index fund, investors are largely insulated from these risks.

Reduced Taxes

When investors buy and sell stocks and bonds, they’re required to pay capital gains tax on the proceeds of the sale. With a static set of investments based on a market index, there are fewer sales taking place and consequently fewer capital gains taxes being assessed. This type of stability gives index funds what’s known as “low turnover.”

Reduced Human Error/Bias

When an investor gets a hot tip, or even just a hunch, it can go several different ways. While it may be possible to predict certain market events, it’s just as likely that the prediction will sour and the investor will lose out. Index funds take this human element out of your investment strategy by spreading your money across so many individual investment vehicles.

Drawbacks of Index Funds

While index funds can provide great results for many investors, they’re not always the perfect solution for everyone. And, as with any type of investment, it’s important to diversify your choices as much as possible.

Lack of Flexibility

Index funds might not be the best option for investors who love the thrill of the chase, as their structure prevents people from tracking them from jumping on high-risk, high-reward opportunities. While they tend to show steady growth over time, your money is tied to these indices, regardless of what happens in the given market or sector they track.

Tracking Errors

Index funds are set up to mirror a market as closely as possible, but there will always be slight inconsistencies between the performance of a fund and the actual market it reflects. These errors can lead to short-term losses or missed opportunities for investors at times. 

Large Company Bias

Many market indices are focused on large, well-established companies rather than smaller organizations with significant room to grow. This means investing solely in index funds could leave investors out of great opportunities relating to new, quickly growing businesses.

Lack of Downside Protection

Index funds generally perform well over time, but all markets can experience short-term volatility. When a market or industry takes a major hit, that will be reflected in your index fund investments.

How to Invest in an Index Fund

Investing in an index fund is similar to buying individual stocks through a brokerage account. Most major platforms—such as Vanguard, Fidelity, or Schwab—offer a wide range of index funds that track benchmarks like the S&P 500 or total market indexes.

General Process

  1. Open a Brokerage Account – Choose a platform that offers index funds and set up your account.
  2. Fund Your Account – Transfer money into your brokerage to start investing.
  3. Pick an Index Fund – Search by name or ticker symbol. Check the fund’s performance and expense ratio.
  4. Make a Purchase – Place a buy order just like you would with a stock.
  5. Automate if You Want – Set up recurring investments or use a robo-advisor to manage it for you.

To determine the best course of action for your financial goals, consult a financial professional. Horizons Wealth Management provides a full range of financial planning services to help you make informed, confident investment decisions.

Bottom Line

Index funds provide a low-cost, diversified way to invest passively and grow wealth steadily over time. While generally safer and simpler than picking individual stocks, they may lack flexibility and expose you to broad market risks. For a tailored investment strategy, consider combining index funds with other options and consult financial experts like Horizons Wealth Management for personalized financial guidance.

Index Fund FAQ

Are index funds a good investment?

Just like any investment strategy, it depends largely on what the investor’s goals and preferences are. Index funds are a good fit for anyone seeking a low-cost entry into investing in a certain market or industry.

Is the S&P 500 an index fund?

The S&P 500 is a market index that specifically tracks 500 or so of the largest publicly traded companies in the United States. This market index is the basis for certain index funds.

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How to Set Long-Term Financial Goals

How to Set Long-Term Financial Goals

Setting long-term financial goals is a necessary component to ensuring stability for you and your family. Without clear goals, it becomes easy to overspend, under-save, or miss out on other financial opportunities. 

Whether you’re looking to buy a house, plan for retirement, pay off large debts, or a combination of all three, you need achievable long-term goals to get you there. The earlier you identify and start planning for your goals, the more likely you are to reach them.

Key takeaways

  • Long-term goals are necessary tools for reaching financial milestones.
  • The SMART method is the best way to break down your goals into achievable steps.
  • Even if you must readjust your goals later in life, starting to plan as early as your 20s is best.

What are long-term financial goals?

Long-term financial goals are those set for five or more years in the future to ensure financial prosperity. These goals include planning for retirement, creating generational wealth, establishing an estate plan, or paying off a large debt, such as a mortgage or student loans. 

How do short-term financial goals differ from long-term financial goals?

Short-term financial goals are those you can achieve in a more imminent period, usually within a year. These can include creating a budget, paying off smaller debts or establishing an emergency fund. While you may also be contributing to long-term goals at the same time, short-term goals differ in that they are completed in a much quicker timeframe. 

Long-term financial goal considerations by age

Time is your biggest asset when it comes to long-term financial goals. The earlier you begin, the easier they will be to achieve. However, it is never too late, and your goals may need to be adjusted over time. Below are considerations for long-term goals based on age.

Long-Term financial goals in your 20s

Generally, your early 20s are the very beginning of your independent financial journey. Knowing where to begin and what goals to set can be challenging. You don’t have to have it all figured out. This is the best time to start learning and taking small steps towards securing your financial future. 

Your 20s are a good time to:

  • Begin retirement planning by opening a retirement account and calculating approximate retirement needs. 
  • Start saving for a down payment.
  • Pay off small debts.
  • Set goals for career advancement.

Even though retirement might feel a lifetime away, it’s best to start preparing early to maximize savings and reduce stress down the road.

Long-term financial goals in your 30s

Your 30s are a time when many settle into their careers and make higher-than-entry-level wages. Ideally, increased financial security will allow you to feel comfortable in working towards long-term goals. 

At this age, goals may include:

  • Paying off student loans.
  • Setting a retirement age.
  • Improving credit score.
  • Continuing or increasing retirement savings contributions.

With a stronger understanding of your aspirations and adult needs, your 30s are a good time to solidify and work towards long-term goals.

Long-term financial goals in your 40s

Life is full of responsibilities in your 40s, from asset ownership to a growing family. Many people review their long-term goals at this time and adjust them for changing needs. 

At this stage, consider:

  • Paying off any remaining non-mortgage debts.
  • Maximizing your earning potential.
  • If you have children, investing in your child’s college fund.

Due to life circumstances and changes, many people at this age take the time to reassess their long-term goals to ensure they still align with their needs. If so, this is a good time to make any adjustments.

Long-term financial goals in your 50s & 60s

At this stage, you are approaching retirement age and should begin to see your long-term goals come to fruition. This is the time to focus on achieving the end stages of your goals and maximizing resources. 

Goals at this age include:

  • Becoming entirely debt-free.
  • Reevaluating your estate plan, including your last will and testament. 
  • Planning for long-term care in old age.
  • Ensuring your lifestyle is sustainable through your planned retirement income.

Why are long-term financial goals important?

Long-term goals are important to avoid stress later in life and ensure you are prepared for retirement and old age. For example, income from Social Security is usually insufficient and must be supplemented with other income. Without long-term financial goals, you could be left without enough money to sustain your lifestyle during retirement.

Tips for setting financial goals (SMART)

Setting goals is one thing; how to actually achieve them is another. According to a poll by NerdWallet, while 9 in 10 Americans (90%) said they set financial goals for 2025, 45% of those goal setters said they either “aren’t on track to hit their biggest money goal or they aren’t sure.”

The SMART method is a framework that can help make long-term goals less daunting. SMART stands for specific, measurable, achievable, relevant, and time-bound. 

For example, if your goal is to buy a house, how will you get there? Creating a SMART goal can help. Rather than just saying “I want to buy a house,” the SMART approach would be “I will buy a house with a $42,000 down payment by saving $700 a month for the next five years.” 

Bottom line

Long-term goals are necessary for ensuring financial security throughout life, but figuring out how to achieve them can be daunting. Horizons Wealth Management’s financial planning and retirement planning services can help you understand, plan for, and achieve your long-term goals.

Long-Term Financial Goals FAQ

What is an example of a long-term financial goal?

A common long-term financial goal is having enough money for a down payment on a house. Others include saving for a child’s college education or saving a certain amount of money for retirement.

What is the first step in creating a successful long-term financial goal?

Use the SMART method. Rather than setting goals with vague objectives, SMART goals require you to break down the process. When you have a clear intention and steps for how you’ll get there, your goals become much easier to achieve. 

Can an investment manager help my long-term financial goals?

Yes, an investment manager can help you reach your long-term goals. They can provide you with individualized strategies that work for your financial needs. 

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What’s the Difference between a Will and a Trust?

Wills vs. Trusts

Estate planning can be complex, as it combines the challenges inherent in managing an individual’s financial assets with the emotional challenges of navigating their final wishes before death. 

Fortunately, there is a vast range of options available for planning your estate, covering every imaginable combination of assets, beneficiaries, and liabilities.

Key Takeaways

  • Trusts and wills are two different types of documents used to settle a deceased individual’s estate.
  • While wills are typically simpler and cheaper to draft, a trust can offer additional benefits that may appeal to individuals with larger, more complex estates.
  • When establishing a trust, you’ll need to designate whether the terms are flexible or fixed, as well as whether the trust will exist while you’re still alive or be formed after your death.
  • No matter what form of estate planning you choose, it’s smart to have a plan for your assets in place long before you think it might be necessary.

What is a Will?

A will is a document that outlines how an individual wishes their estate to be handled after their death. Every will is different, but most will include some or all of the following details:

  • Executor – The executor of a will is the individual responsible for carrying out the deceased individual’s wishes, also known as the decedent. The named individual is expected to ensure the terms of the will are followed as closely as possible.
  • Beneficiaries – Beneficiaries are the recipients of the deceased person’s assets. This can include family members, partners, friends, or anyone else the decedent wishes.
  • Terms – In addition to naming recipients of the decedent’s assets, a will should also explain how the assets will be divided and what, if any, conditional terms they wish to place on the distribution of said assets.

Not all assets need to be included in a will—many financial assets, for instance, require the owner to name beneficiaries when creating the account or other financial arrangement. A will can cover the remainder of the decedent’s assets that do not already have named beneficiaries.

Tax Implications of Wills

The tax implications of an inheritance, no matter how it is structured, can be complicated. Most estates do not reach the threshold for triggering the federal estate tax—a tax levied on the distribution of estates totalling more than $13.99 million in 2025—and only a few states have estate taxes of their own.

Inheritance taxes are also not universally applied and can vary from state to state. However, most places will levy capital gains taxes on inherited assets that have since matured and generated new wealth for their beneficiaries.

If you are unsure of your tax requirements for inherited financial assets, the IRS offers a convenient tool to determine your inheritance tax liability.

What is a Trust?

A trust is a legal and financial arrangement in which an individual, known as the grantor, entrusts the management of financial assets to a third party, known as a trustee, for the benefit of a beneficiary. While these types of arrangements are frequently used for estate planning purposes, trusts can also be utilized for other purposes. Individuals who are unable to manage their own finances or those with minor beneficiaries may also benefit from using a trust to manage their funds.

Types of Trusts

Not all trusts are the same, and which type of trust you employ in your estate planning process will largely depend on your unique financial circumstances and the beneficiaries you plan to name in the document. The following are some of the most commonly used types of trusts.

Living Trust

A living trust is created while the grantor is still alive, providing the grantor with considerable flexibility in how they would like their assets managed. In many cases, it also allows beneficiaries to avoid the often costly process of settling an estate through probate.  These trusts can be further broken down into two types of financial arrangements.

A revocable trust is an arrangement created by a living grantor that outlines the terms for dividing the grantor’s assets after their death. The trust is considered revocable if the grantor can alter or revoke the terms of the agreement. 

This type of trust is suitable for individuals who wish to transfer their assets to named beneficiaries; however, it has some drawbacks. Because the grantor still technically controls the assets while they are living, creditors may still have a valid claim to the assets if the grantor owes money or is targeted by lawsuits upon their death. 

In cases where a grantor has concerns about creditors pursuing their assets after their death, an irrevocable trust could be a better option. Once these types of trusts are established, their terms cannot be changed, making them a less flexible option than revocable trusts. The upside, however, is that they offer better asset protection from creditors who might seek to claim the grantor’s assets before they are transferred to the beneficiaries.

Testamentary Trust

Unlike living trusts, testamentary trusts are established after the grantor’s death—usually through terms outlined in the decedent’s will. While living trusts can be either revocable or irrevocable, testamentary trusts are always irrevocable, ensuring that the terms cannot be altered after the grantor is no longer able to participate in their implementation.

Testamentary trusts generally require less work on the part of the grantor and the trustee, as the document doesn’t require asset management until after the grantor’s death. They are also commonly used when the grantor wishes to distribute assets on a set schedule to minor beneficiaries or other individuals who need a more structured distribution of their assets.

The biggest drawback to this type of trust arrangement is that it doesn’t avoid the probate process in the same way certain living trusts can. Probate can be complicated and expensive in certain circumstances, so it’s important to consult with a professional before choosing which type of trust is right for you.

Charitable Trusts

Not all beneficiaries are friends and family members; in many cases, a grantor will choose to establish a trust to benefit a charitable organization. These types of trusts are always irrevocable, and can offer a variety of benefits to the grantor both during their lifetime and for their other beneficiaries after their death.

There are several tax benefits to establishing these types of trusts, and in most cases, they will generate income for both the charitable organization and other, non-charitable beneficiaries in the long term. The IRS has helpful pages on how charitable trusts work, along with their tax implications.

Special Needs Trusts

Many trusts are established to provide support to individuals who require additional assistance in managing their assets. In cases where a single, lump-sum inheritance could pose a hindrance to a given beneficiary, a special needs trust can help manage the grantor’s assets on their behalf. 

These trusts typically distribute a small portion of the assets contained in the trust to the beneficiary on a set schedule, creating a consistent income stream for them over time. Many special needs trusts are also designed to allow beneficiaries to continue receiving assistance from programs like Medicaid and Supplemental Security Income, as these trusts can be structured not to be counted toward the individual’s income level when determining eligibility for these government benefits.

Tax Implications of Trusts

The tax implications of trusts depend largely on the type of trust you establish, where you establish it, and who you name as beneficiaries. In many cases, the income received from your trust will be subject to income tax requirements for your beneficiaries. In some cases, your beneficiaries may need to pay capital gains taxes on some or all of the assets they receive.

Generally speaking, tax issues related to trusts are more complex than those involving wills. If you have questions about potential tax liabilities for your trust, Horizons Wealth Management can help guide you in the right direction. Get in touch today to learn more about financial planning, retirement planning, wealth management, and managed portfolio services.

Wills vs. Trusts: How to Choose

There is no one-size-fits-all solution for estate planning, and whether you choose a will or a trust to handle your affairs after your death will largely depend on the size and complexity of your estate, as well as the number of beneficiaries and how you wish for them to receive your assets.

Generally speaking, a will is a simpler option for managing your estate. They are cheaper to create, easy to interpret, and enable the job to be done quickly and simply for estates with uncomplicated finances and a small number of beneficiaries.

If, however, your estate is particularly large or consists of a more complicated arrangement of financial assets, it might be worth it to establish some trust. While they cost more to establish initially, trusts can help certain assets avoid the probate process. They may offer you and your beneficiaries a range of tax benefits not available to individuals managing their estate with a will.

Bottom Line

Before deciding to draft a will or form a trust, consider the size and structure of your estate. Do you know who your beneficiaries are, and how you’d like them to receive your assets? Do you anticipate creditors will come after your assets when you pass away? Are there important charities you wish to include in the distribution of your assets?

All of these questions can help guide you toward the right estate planning tools for your unique circumstances. Whether you decide to go with a will or some form of trust, having your estate plan in place can be a tremendous relief as you navigate the complicated process of allocating your assets for future generations.

Trust vs. Will FAQ

How Does Estate Planning Affect Unmarried LGBTQ+ Couples?

As with any other couple, married or otherwise, effective estate planning can help save a great deal of heartache and potential financial misfortune. Individuals do not need to be married or even in a romantic partnership to be named as a beneficiary or executor of an estate.

In certain states, the spouse of an individual who dies without any estate planning documents in place will be named the default executor. However, this convention varies from state to state. The best way to ensure your wishes are followed after you die is to establish an estate plan long before you think it might be necessary.

Are Wills or Trusts Needed If Beneficiaries Are Designated on an Account?

No, generally speaking, an account with designated beneficiaries will be distributed to those named beneficiaries regardless of what a will or trust might say to the contrary. It’s essential to ensure that the named beneficiaries across these accounts and your will or trust are consistent to avoid unnecessarily prolonging the probate process.

At What Net Worth Do I Need a Trust?

There is no hard-and-fast rule for how much money you need to have before a trust is required, although they are typically used in situations where estates have a higher net value and a larger number of assets to distribute. 

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Questions to Ask a Financial Advisor

For many people, the journey to financial stability begins when they meet with a financial advisor. No matter what your assets look like, how many people are in your household or what you hope to accomplish with your finances, finding the right advisor is a crucial first step in achieving those goals.

Key Takeaways

  • Asking the right questions during a meeting with a financial advisor can reveal their ability to perform their job and achieve your specific financial goals.
  • Not all advisors are right for all clients, so it’s important to find someone who is qualified and experienced in situations similar to your own.
  • Whatever you hope to achieve through investing, you should focus on your long-term goals and let those guide your decision-making.

Determine Financial Goals

Before you can choose the right financial advisor, you need to understand what you hope to achieve. If you’re planning for retirement, for instance, you need to understand what that looks like for you—how much money do you need each month? How often will you be making large expenses? Will you continue to support other members of a household and, if so, to what extent?

All of these questions should guide your goal-setting process, and you should have a relatively clear picture of what you want before you start seeking assistance from a financial professional.

Questions for a Financial Advisor

Once you understand your financial goals, it’s time to start hunting for the right advisor. This process can be made much simpler by preparing some questions ahead of time, which will show you how qualified the advisor is and how experienced they are with individuals in similar circumstances to your own.

Are You a Fiduciary?

A fiduciary is a financial professional who is legally required to act in the best economic interests of their clients. Certain types of financial advisors, like Certified Financial Planners, must also be fiduciaries, but not all financial professionals are. Knowing your advisor is legally bound to help you make the best financial decisions is a relief for many investors.

How are You Paid?

Different advisors use different compensation plans. Typically, financial advisors receive either a commission, a set fee, or a combination of the two.

Advisors who operate on a commission basis will receive an agreed-upon percentage of the proceeds from the sale of financial products they manage for their clients. At the same time, fee-only compensation is typically either a set hourly rate or a percentage of the total value of assets managed.

For larger financial planning firms, advisors might also be paid a salary based on the company’s total funds generated.

What is Your Investment Philosophy?

No two people see the investing world exactly the same, and it’s important to find an advisor whose perspective on investing aligns with your long-term goals. 

An advisor’s investment philosophy considers factors like their tolerance for risk, preferred investing strategies, beliefs about the market, and many others. These ideas, coupled with the advisor’s professional experience, will dictate how your assets are used to accomplish your financial goals. 

What Services Do You Provide?

Many financial advisors offer a wide range of services, but often they will specialize in certain aspects of investing and financial planning. Asking about available services and specialties when seeking an advisor will ensure you find the right person for your needs.

If, for instance, you plan to send several kids to college in the future, it’s good to know your prospective advisor has experience navigating the costs and challenges of doing so economically. If you’re planning to retire soon, you want to find an advisor who knows every little tip and trick to maximize your retirement savings. Whatever your goals might be, there’s a specialist out there to help you achieve them.

How Will We Work Together?

Some people want to be involved in every little detail of their financial planning, while others prefer not to see how the sausage is made. Finding the right advisor means finding a professional who communicates in the style and frequency that suits your needs, whether that’s consistent and specific updates or more spread-out, big-picture check-ins. 

No matter what you want your working relationship with your advisor to look like, it’s critical to find someone who has clear, effective communication skills and who knows how to break down the necessary information for you to understand in a simple, efficient manner.

How Do You Track Investment Performance?

Whatever your advisor’s investment philosophy and strategy, you’ll want to receive periodic updates about your investments. Understanding how an advisor interprets the effectiveness of their investment decisions up front will allow you to see how things are going over time and can provide insight into their effectiveness as a planner. 

What Professional Experience Do You Have?

No matter how an advisor is trained or what their investing strategies look like, there’s little substitute for working experience. A seasoned veteran of the financial industry will have a better idea of how to navigate complex financial situations and, perhaps more importantly, will know what to do when things go unexpectedly wrong. In the event of an unavoidable financial issue, it’s always good to have someone on your side who’s been there before.

What Types of Clients Do You Typically Work With?

Managing finances and investments requires context. What works for one person or family might not be right for another, and it’s generally a good idea to find an advisor who has worked with clients in similar situations.

An advisor who works exclusively with ultra-high-net-worth individuals, for instance, might not be as experienced in navigating lower-stakes investing strategies or vice versa. Financial professionals who work primarily with single-income, child-free homes might not know as much about financial planning for a large family. Finding someone who’s experienced working with people like you can be a huge help when navigating tricky financial scenarios.

What to expect at a financial planning meeting

A financial planning meeting is your opportunity to get to know your financial advisor and for them to learn more about you and your goals. A typical meeting will include an overview of your long-term plans and the current state of your finances to help your advisor better understand what’s possible and what you hope to accomplish.

You will also have the opportunity to ask these important questions during the meeting. This will allow you to learn more about the advisor’s experience and mindset and determine if they are a good fit for your financial needs before committing to a working relationship with them or their firm.

Bottom Line

Starting to work with a new financial advisor is an important step toward accomplishing your goals, and finding the right person to work with is crucial to succeeding in those goals. By asking questions and arriving well-prepared to your initial meeting, you can greatly increase your chances of finding someone who will serve as a good partner for your financial future.

Horizons Wealth Management offers various services, such as wealth management, managed portfolios, and financial planning. Schedule a call today to start planning your financial future.

Financial Advisor FAQs

Is it worth it to pay 1 percent to a financial advisor?

This depends on your individual situation, but generally, a 1 percent fee is fairly typical for these types of services. For less-complex financial advising, this could be higher than necessary, but for extremely complicated tax situations, it could be relatively affordable. If possible, try to compare rates for your situation across several prospective advisors to get a sense of what’s normal for you.

What rate of return should I expect from my financial advisor?

This is also highly dependent on your unique situation and will likely be influenced by your tolerance for risk and that of your advisor. Safer investments will yield lower returns with a higher rate of certainty, while riskier moves could produce a higher rate of return with less certainty.

How do you know a financial advisor is good at their job? 

The simplest way to know if an advisor is skilled at their job is to check for customer testimonials and ask clear, straightforward questions during your initial meeting. An advisor with a great deal of experience and positive reviews is likely to be in touch with what their clients want and how to accomplish those goals.

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How to Build Wealth in Your 50’s

50th birthday

Key Takeaways

  • Focus on eliminating high-interest debt to free up resources for savings and investments, setting a solid foundation for retirement.
  • Trim excess expenses to increase funds available for investing in your retirement fund, laying the groundwork for financial security.
  • Maximize “catch-up” contributions to tax-advantaged accounts, enhancing your nest egg with the help of professional financial advice.

Navigating your 50s can be a critical period for financial planning, standing at the crossroads between active employment and impending retirement. This decade is an opportune time to assess, adjust, and accelerate wealth-building strategies to ensure a secure and comfortable future. In this guide, we will explore essential tactics for enhancing financial health in your 50s—from maximizing retirement savings with strategic contributions to diversifying income streams beyond traditional means.

Reduce Debt

In your 50s, paying down debt is crucial for building wealth and securing a financially stable future. This period marks a strategic shift from accumulating to eliminating debts, recognizing that each dollar paid off not only increases net worth but also frees up more resources for investments and savings. Reducing debt not only bolsters financial health but also alleviates the stress tied to high liabilities, paving the way for a smoother transition into retirement.

A strategic approach to managing debt starts by targeting high-interest obligations first—such as credit card balances or personal loans—which can lead to substantial interest savings over time. Additionally, consolidating debts into a lower-interest option can simplify repayment and help reduce overall costs more effectively.

A targeted debt strategy focuses on eliminating high-interest debts first—like credit cards and personal loans—to minimize long-term interest payments. Consolidating multiple debts into a lower-interest loan can also simplify your finances and lower your overall repayment burden.

Expenses Review

At this stage, fine-tuning your budget becomes crucial, as identifying and trimming unnecessary spending can free up significant funds for saving and investing. It’s time to critically evaluate your lifestyle habits—consider downsizing services you no longer need, shopping smarter by seeking discounts, or even switching to more cost-effective brands or providers.

Embracing frugality isn’t about sacrificing joy but rather choosing financial health over temporary pleasures. Many people use budgeting tools to gain insight into monthly expenditures, making it easier to spot areas ripe for reduction. For example, consolidating trips to save on gas, opting for home-cooked meals over eating out frequently, and canceling underused memberships can all contribute toward enhancing your financial situation. Investing the money saved from these strategies not only bolsters your retirement fund but also brings you closer to achieving lasting financial security. In essence, conscientious spending in your 50s lays down a solid foundation for wealth that supports both current needs and future aspirations.

Maximize Retirement Contributions

Maximizing retirement contributions in your 50s is crucial for building wealth as you edge closer to retirement. As you get closer to retirement, you enter into a period that allows for “catch-up” contributions in tax-advantaged accounts, offering a chance to increase your savings and benefit from compounding interest significantly. By prioritizing these additional deposits, you can enhance the growth of your retirement fund substantially.

Adjusting your budget to boost these contributions is essential. Whether it’s through an employer-sponsored 401(k) or an individual IRA, increasing your savings now can make a profound difference in the size of your nest egg. Consulting with a financial advisor could also optimize this strategy, ensuring that you’re making the most out of every opportunity to secure a financially comfortable future.

Carefully Manage Risk

Managing risk becomes increasingly important as you navigate through your 50s. This phase requires a strategic reassessment of your investment portfolio to ensure it aligns with your current risk tolerance and retirement goals. As retirement nears, the focus should shift toward preserving capital while still achieving reasonable growth. Diversifying investments across different asset classes—such as stocks, bonds, real estate, and possibly precious metals—can mitigate risk and reduce volatility in your portfolio.

In addition to diversification, consider adjusting the allocation of assets in your investment mix. While equities offer higher growth potential over time, they come with increased volatility. Gradually increasing the proportion of fixed-income securities can provide more stability as you approach retirement age. Regularly reviewing and rebalancing your portfolio ensures that it remains consistent with your evolving risk appetite and financial objectives, which is a critical step toward safeguarding wealth during this pivotal decade.

Establish a Retirement Plan

Creating a comprehensive retirement plan in your 50s is an essential step toward securing financial stability and building wealth as you approach the golden years. This process begins with a clear assessment of your current financial situation, including savings, investments, debts, and expected income streams in retirement. Understanding these elements allows you to set realistic goals for retirement living expenses based on your desired lifestyle. It’s also crucial at this stage to account for unforeseen costs such as healthcare, which can significantly impact spending needs.
To effectively make a retirement plan:

  • Evaluate Your Financial Status: Start by listing all sources of income (pensions, savings accounts, investment portfolios) and anticipated expenses.
  • Set Clear Retirement Goals: Define your retirement age and the lifestyle you wish to maintain—traveling, hobbies, and relocation plans should be considered here.
  • Calculate Expected Retirement Income Needs: Estimate how much money will be needed annually during retirement, considering inflation rates over time.
  • Develop A Savings Strategy: Determine how much must be saved from now until retirement to meet future income needs. This may involve maximizing contributions to tax-advantaged accounts like IRAs or 401(k)s.

A critical part of creating this plan involves regularly reviewing it—preferably annually—to adjust for any changes in personal circumstances or financial markets that could affect long-term objectives. Engaging with a professional financial advisor can provide valuable insights into complex areas such as tax planning and investment management tailored specifically towards achieving your individualized goals efficiently while navigating through the complexities of preparing for a comfortable retirement life.
Horizons Wealth Management can help you navigate your financial questions, no matter your age. Get in touch today to learn more about our wealth management, financial planning, retirement planning and managed portfolio services.

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What are RMD (Required Minimum Distributions) and What You Need to Know

Senior woman with grandchild

After a certain age, individuals with retirement accounts must withdraw a certain amount from these accounts each year as a minimum. This withdrawal is known as a required minimum distribution, or RMD, and it typically becomes mandatory at age 73.

Key Takeaways

  • Required minimum distributions are the minimum amount you must withdraw from your tax-deductible retirement accounts.
  • These withdrawals are required by law after the age of 73.
  • RMDs can be donated to reduce or eliminate the tax burden created by the additional yearly income.
  • The amount of an RMD is determined by the total value of your qualifying retirement accounts and factors like age, beneficiaries and the original owner of the retirement account.

What Does RMD Stand For and When Does it Start?

Required minimum distributions have been a part of retirement planning in the United States since the mid-1970s with the introduction of IRAs as a new type of long-term investing mechanism. These withdrawals are required by statute for all types of retirement accounts except for Roth IRAs and certain similar types of accounts.

Most people with retirement accounts must start making these withdrawals at age 73, but there are some exceptions to this rule. You aren’t technically required to make your first withdrawal from your retirement accounts until April 1 of the year following your 73rd birthday, for instance. Qualifying charitable contributions from your retirement accounts are also counted toward your RMD, meaning you can offset some or all of your required withdrawal with certain philanthropic contributions.

What If I’m Still Working?

There are also RMD exemptions for individuals who are still working at the company sponsoring their retirement plan, as long as they own less than 5 percent of the company administering the account. This allows people who continue to work past the minimum retirement age to take full advantage of the benefits offered by an IRA or similar account.

What Accounts Require RMDs?

RMDs are required for many types of employer-sponsored retirement plans. The most common types of accounts subject to RMD rules are:

  • Traditional IRAs
  • Rollover IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k)s
  • 403(b)s

It’s worth noting again that Roth IRAs, Roth 401(k)s and other types of Roth accounts are not subject to the same RMD requirements as these retirement plans.

How to Determine RMD Amount?

How much you’ll need to withdraw from your accounts each year is calculated by dividing each account’s balance as of Dec. 31 by a life expectancy factor calculated using tables provided by the IRS. These life expectancy factors are determined based on a number of factors relating to you, your beneficiaries, and the original owner of the retirement account. 

How to Handle Multiple IRAs

RMDs are calculated for each individual account—if you have more than one IRA, you will need to calculate the RMD for each one based on all the factors considered by the IRS. Once you’ve determined your total RMD for the year, however, you can withdraw that amount from any one IRA or combination of accounts as long as the total withdrawal meets or exceeds your minimum requirement.

How are RMDs Taxed?

Assuming all of your retirement account contributions were tax-deductible, the income gained by withdrawing your RMD will be treated like any other income and taxed accordingly.

In some cases, an individual might make contributions to an IRA or other retirement account that are not tax-deductible but are still subject to an RMD after age 73. In these cases, you will need to work with the IRS or your tax professional to determine how much of your RMD income must be taxed and how much is exempt for the year.

How to Use RMD Assets

Funds withdrawn from your retirement accounts through an RMD can be used in a variety of ways, and some of these uses can help reduce your tax burden or make the assets more useful to your beneficiaries. 

Reinvest the funds

One common use for RMD funds is to reinvest the money elsewhere simply. This can help protect the money from inflation and continue to make it work for you even once it’s no longer in a tax-protected retirement account.

The only caveat to this approach is that the funds cannot be placed back into a typical retirement account—if they are made using RMD funds, the investments must be made into a taxable form of investment account.

Donate to Charities

Charitable donations are another common use of RMDs, and if they’re done correctly, you can avoid paying taxes on some or all of the money withdrawn for the year. Donations made to charitable organizations directly out of your RMD funds are called qualified charitable distributions, or QCDs, and up to $100,000 of these funds each year can be omitted from your taxable income.

Support Education for Your Family

If you have young family members planning to go to college, a 529 education savings plan might be a good use of your RMD funds each year. These savings plans allow your money to continue to grow tax-free and will remain tax-deductible as long as the funds are used for a qualifying educational expense in the future.

Bottom Line

While an RMD can seem confusing at first, especially if you’re recently retired or haven’t had to make withdrawals from your retirement accounts yet, the process is relatively straightforward and doesn’t have to be a financial burden if done correctly. By using your withdrawal wisely through reinvesting and charitable contributions, your RMD can become an opportunity rather than a burden each year. At Horizon Wealth Management, we can help you ensure your financial future is clear with retirement planning services and financial planning services. Schedule a discovery call today!

RMD FAQs

What is the biggest RMD mistake?

Probably the most common mistake people make with their first RMD is failing to withdraw the correct amount or missing the withdrawal deadline. These errors are sometimes accompanied by substantial fines from the IRS, but they can be easily avoided by working with a qualified investment professional to ensure the process is followed correctly and in a timely manner.

Is it better to take RMD monthly or annually?

In the long term, there is little difference if any in an individual’s finances if they choose to withdraw their RMD monthly, quarterly or annually. This decision should be made based on an individual’s needs and personal preferences, and will likely be informed by what other forms of income, if any, the person has.

Do RMDs affect Social Security or Medicare premiums?

RMDs do not directly impact social security payments but can affect Medicare premiums. If your RMDs raise your tax bracket, this can have a secondary effect on the amount of taxes paid on social security income and the Medicare surcharge premiums calculated based on your Modified Adjusted Gross Income.

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How Much Money You Need To Save Each Day To Become A Millionaire By Age 65

Becoming rich is nothing more than a matter of committing and sticking to a systematic savings and investment plan.

If you want to get rich, start investing- and start as early as you possibly can.

To illustrate the simplicity of building wealth over time, Bach created a chart detailing how much money you need to set aside each day, month, or year in order to have $1 million saved by the time you’re 65.

Next time you consider running to Starbucks for a $4 latte, think about this chart and consider redirecting that coffee cash to your savings.  Check it out here.

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Tony Robbins’ 10 Tips for Living Rich

If you want to be happy, but you’re having a tough time in life due to personal or financial issues, it’s important to take whatever steps possible — even small ones — to progress and grow.

This best-selling author’s advice has been featured prominently in magazines, digital media and in national televised media. He travels all over the country every month for events to inspire people in their lives and in business.

Click HERE for some of Tony’s top pieces of advice on how to change your mindset in ways that can have a positive impact on your life and your finances.

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