Using Your Savings Plan as an Inheritance

The decision to leave an inheritance for your children or others you care about has an impact on how much you save, how you invest, and how you manage your distributions when you retire. Before deciding on the amount you will leave to others on your death, consider the following:

Your own income needs - It is important to determine how much to save for yourself. Retirement calculators can help you determine how much you need to save and how much you can withdraw each year after you retire.

Rising health care costs - Even if you planned well for your retirement, unexpected illness and rising health care costs can quickly deplete your retirement assets, particularly given government programs, such as Medicare, offer little or no coverage for long-term care.

Outliving your income - With life expectancies increasing, it is important to manage withdrawals of your retirement savings carefully to avoid depleting your assets during your lifetime. Withdrawing only the amount of money you need and letting the rest continue to work for you is the smart strategy and the essence of an effective systematic withdrawal strategy.

Tax implications - Keep in mind that certain inherited assets are eligible for favorable tax treatment if held outside a retirement account. Such assets may qualify for a "step up" in tax basis at the time of your death, which can greatly reduce the capital gains tax that your heirs pay on assets they inherit that appreciated in value during your lifetime. taxation at the ordinary income rates applicable to your heirs. To ease the tax bite of receiving their plan benefit, your heirs may wish to roll it over to an inherited IRA so they can withdraw their benefit slowly over their lifetime rather than taking it out all at once. This would enable them to delay the bite of income taxes and reduce the possibility of being pushed into a higher tax bracket. If you are leaving retirement assets to others, the availability of rollover treatment can mean a significant saving for your heirs — and rollover treatment is not available when your estate is your beneficiary. Keep in mind that under the Northrop Grumman Savings Plan, if you are not married and you do not name a beneficiary, your estate is considered your beneficiary. Therefore, if either you name your estate as your beneficiary or you are single and fail to name a person who survives you as a beneficiary, you prevent your heirs from taking advantage of a rollover to an IRA — an important tax-deferral device.

How to Leave Your Legacy

Here are some examples of ways to systematically withdraw money from the Northrop Grumman Savings Plan or other savings vehicles without penalty and how to ensure that your wishes are met.

Systematic Withdrawal Plan (SWP)

Gift Taxes

Beneficiary Designation

A systematic withdrawal plan is a type of payout plan set up by a mutual fund company that allows you to make withdrawals of a fixed or variable amount at regular internals. There are two types of SWP:

Capital Retention Systematic Withdrawal Plan (CRSWP): The goal of this type of SWP is to pay out a fixed percentage of the account each year with the full intention of retaining capital. The amount of each withdrawal is determined by applying a set percentage (e.g., 4%) to an average account balance over a specified period (e.g., the average account balance over the previous three years).

Capital Depletion Systematic Withdrawal Plan (CDSWP): With this type of plan, the goal is to pay out both principal and accrued income at a steady rate that is expected to deplete the account in its entirety by some target date in the future.

Like an annuity, SWPs are designed to spread distributions of your account balance over your lifetime or some pre-determined period. However, unlike an annuity, SWPs give you the added flexibility to withdraw money without penalty. Keep in mind that in some cases, if your SWP is applied to a tax-advantaged account, like your IRA, and you attained age 70½ (or if you are a beneficiary), you may have to withdraw an additional amount in some years to avoid a minimum distribution tax penalty.

Before you commence a systematic withdrawal plan, study it to determine whether it might be appropriate for your retirement income needs. Although the Savings Plan doesn’t provide an SWP withdrawal option, a financial advisor can help you determine how much to withdraw from your account at specific intervals to help you meet your retirement income objectives.

A gift tax is a federal tax applied to an individual giving something of value to another person. When you gift an asset, you are responsible for paying the gift tax, but there are ways around it. The following are generally excluded from gift tax:

1. Gifts to your spouse

2. Gifts to a political organization for use by the political organization

3. Gifts that are valued at less than the annual gift-tax exclusion for a given year ($13,000 as of 2009)

4. Medical and education expenses such as payments made by a donor to a person or organization such as a college, doctor, or hospital.

It’s important that you name a beneficiary when enrolling in a savings plan. If you are not married, this ensures your retirement accounts pass to your beneficiaries without going through probate. If you are single, you are free to name anyone as your beneficiary. If you are married, you are required to name your spouse as the primary beneficiary UNLESS your spouse signs a written waiver.

You can name more than one beneficiary to share in the proceeds by specifying the percentage each beneficiary will receive (the shares do not have to be equal).

Keep in mind that any amounts you leave to someone other than your spouse under the plan are counted as part of your estate for estate tax purposes. (Federal estate tax applies to estates with more than $3.5 million in total assets in 2009. Although the federal estate tax does not apply to those who die in 2010, it applies to estates worth over $1 million in 2011). In addition to the federal estate tax, your state may impose an estate tax and provide for exemptions that are lower than these levels. If your total estate exceeds $1 million, it may end up being subject to the federal estate tax, so consider discussing your situation with an estate planning attorney.

These solutions may or may not be right for your situation. Consult with your attorney, financial advisor or trax advisor to help you determine the best approach. Evaluating your options will ensure your wishes are followed while maximizing flexibility for your heirs.

This Investment Center includes links to tools and information provided by organizations that are not associated or affiliated with Northrop Grumman. The tools and information provided by these organizations are not the property of Northrop Grumman, and Northrop Grumman is not responsible for their accuracy, completeness, or continued availability. You are solely responsible for the investment and asset allocation decisions you make pertaining to your personal savings and investments, including investments in the Northrop Grumman Savings Plan, Financial Security and Savings Program, and any other savings plans sponsored by Northrop Grumman