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9 Tips for a Tax-Free Retirement

by | Mar 31, 2021

Less than half of workers believe that income from pensions, Social Security, and annuities will cover their living expenses when they are retired. The last thing you want when you retire is to stress about being able to afford to live. Luckily, there are ways to ensure a peaceful, tax-free retirement.

Read on to find out about nine tips you can use to set yourself up for a tax-free retirement.

1. Roth IRA

A Roth IRA will let you have a tax free retirement by allowing you to invest up to $6,000 per year. If you are over 50, you can add $1,000 per year.

It acts as a long-term savings account. Anything you contribute to this fund will grow tax-deferred. Once the account holder is almost 60, the accumulation will be tax-free.

You can use these funds for tax-free retirement plans, but it’s okay not to use them all. If you don’t use these as retirement funds, the remainder will be passed to your heir. The other benefit of a Roth IRA is that you don’t have to take out required minimum distributions, but your heir will have to.

Roth IRAs are taxed first in first out, otherwise known as FIFO. This means, as the account holder, you can desire liquidity and the principal will be able to be withdrawn without taxation.

2. Life Insurance

Life insurance works similarly to a Roth IRA and has a lot of advantages. Properly funded life insurance is also taxed FIFO and you have tax-deferred build-up.

Most of the time, you can cash in this policy at any time. Like Roth IRA, the policy will go to the heir tax-free.

There are no limits to the amount you can fund on your life insurance policy. You can even pledge the amount as collateral if you need a loan. This policy can be used for a lot of different circumstances.

Life insurance policies can offer long-term care, aka LTC. These provisions will give you benefits that Roth IRAs cannot.

Along with tax-free retirement income, life insurance will be beneficial because you can decide when your heir receives the benefits. You can stretch the benefit throughout the years if you want to. You can request information about a life insurance plan and learn how it can benefit you in retirement from Emerald’s Secure.

3. Roth 401(k)

If your retirement plan allows a Roth 401(k), consider yourself lucky because this is a great feature to have. It is similar to a Roth IRA because the growth and withdrawals will be tax-free.

With a Roth 401(k), you can contribute up to $18,500 a year. If you are over 50, you can add $6,000. You will have to pay taxes on the contributions, but there is no income restriction.

4. Municipal Bonds

A municipal bond will have to fit your specific investment needs. These bonds can work for your tax-free retirement accounts. The income distributions from these bonds do not require federal income taxes but may be subject to state income taxes.

Because of this, the bonds have a lower interest rate. You also risk a lot of investment and reinvestment risks, especially in a rising rate environment. A tax-free retirement may be nice, but the risks may not be worth it in some cases.

There is also room for default. Income from a municipal bond will be tax-free, but your gains might be taxable.

5. Health Savings Account (HSA)

This can be the final addition of a tax-free income for some. For contributions, you can get a tax deduction. If withdrawals are taken properly, they can also be tax-free.

You have to have a certain type of health insurance to use an HSA account. If you want your retirement tax-free with these accounts, you have to look through limited plans. You can hold funds until your retirement instead of using them for medical expenses.

6. Claim Double

Seldom know that you can claim double retirement plan contributions if you are a teacher, public sector, healthcare worker, or a nonprofit employee. Contributing twice as much means you can add almost $20,000 to your retirement plan accounts.

This means you can take advantage of tax-free savings amount. You could be saving almost $40,000 per year.

7. File for Uncle Sam’s Retirement Savings Credit

If you are in the middle or lower class, you may be able to claim a tax credit. This could be up to 50% of your retirement plan contribution.

Those who are married and file together that have an income of $65,000 or less can contribute to a qualified retirement plan. This may make you eligible for a tax credit.

8. Retire in the Right State

Some states want no state income taxes. These states are Florida, Tennessee, South Dakota, Wyoming, Texas, Nevada, and Washington.

States like New Hampshire and Tennessee do tax dividends and interest. Most states don’t do social security taxes, which is a good thing for retirees.

Don’t just pack up and move for retirement without checking out the rules in the state you are moving to. Be sure to evaluate the taxes in your future home.

9. Self-Employed Retirement Savings

If you are self-employed or just have your side job, you can use that to your advantage for a tax-free retirement. This self-employment income lets you add to a solo 401(k) and a simplified employee pension plan, otherwise known as a SEP.

With these plans, you can contribute up to 25% of your self-employment income. If you are over 50, you can put in up to $57,000. Those who are under 50 can add up to almost $20,00.

Tax-Free Retirement for You

Nobody wants to deal with a difficult retirement. This is why you should ensure you have the right plans that can get you by. You can be at peace in retirement by setting up a tax-free retirement plan beforehand.

For more information about financial retirement plans, contact us today.

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