If you’re starting to think about estate planning, you may have heard about “Payable on Death” accounts. But what are they, and how do they work? Should you divert your retirement funds into one or instead focus on using retirement to pay off debt? Here is what you need to know.

What is a Payable on Death Account?

A payable on death account (POD) is a bank account that allows the owner’s beneficiaries to receive payments, typically in the form of inheritances or life insurance proceeds, after the account holder’s death.

Beneficiaries must be named in the account owner’s will or trust, and the account must be open at the time of death. POD accounts are often considered a good investment because they offer tax-free growth and potential estate tax savings. However, POD accounts can also be risky because beneficiaries may not receive all of their inheritance if the account is closed before all payments are made.

What are the benefits of a POD account?

The benefits of a POD account include simplicity and convenience and the peace of mind that comes with knowing your money will be available when your loved ones need it. A POD account is also a good option for those who cannot manage their own finances due to illness or age.

The risks of a POD account

Before opening a POD account, there are a few risks to keep in mind. First, beneficiaries may not receive all of their inheritance if the account is closed before all payments are made.

Second, POD accounts can be risky because they’re not FDIC-insured. This means that the bank cannot guarantee that your money will be safe if something happens to the bank itself.

Finally, POD accounts don’t offer any interest income, so you may not make as much money as you would with other types of savings accounts. Talk to your financial advisors about these risks and decide whether a POD account is right for you.

Is it a good idea to use a POD account?

Some people believe that having a POD account is a good idea because it can help reduce estate taxes and provide financial stability for beneficiaries. However, there are some disadvantages to having a POD account, including the risk that the beneficiary may not receive the money if the account holder dies before they can access it. Additionally, if the beneficiary does not live in the same state as the account holder, they may have difficulty accessing the funds. So, while a POD account may be a good option for some people, it’s important to weigh the risks and benefits before deciding.

The bottom line

A payable on death account can be a great way to ensure that your loved ones will be cared for after you die. However, it is essential to understand the risks and benefits of this type of account before deciding whether to open one.

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