Earning tax-free dollars is the ultimate goal of everyone planning for retirement, and with good reason. You’d no longer be working, so income would be limited. However, expenses won’t ease up because you still have to pay the same bills you did while working. And with old age creeping in, there may be more health-related charges. So, it bites a little more when the checks come in and you have to pay taxes on your pension, Social Security, and 401(k) disbursements.
Of course, one solution would be to make plans now to help you earn more money in retirement. But in this article, we’ll show you something even better: how to ensure you get more dollars and pay less tax when you retire. It all starts with actions you take now – while you’re still working. Whether you started saving for your post-work years at 22 or just want to start now that you’re 45, this article has something for everybody.
Here you go:
1. Contribute to a Roth IRA
The Roth IRA is the most popular account for tax-free retirement savings, and you should try to maximize it. For 2022, you’d be able to contribute $6,000 ($7,000 for people 50 years and older). This amount won’t be tax-deductible now, but it earns tax-free interest over the years. And when you retire, you can withdraw everything (savings + interests accrued) as tax-free income.
Is $6,000 a year too much to save toward retirement? That depends on who you ask. But if you can afford to put it aside, you’d be glad that you did. Say you start saving $6,000 yearly at age 30 with an annual interest rate of 8%. By the time you hit 65, you’d have about $1.1M saved up. And it’s all tax-free. What if you started saving at 25 years? That figure would increase by over $500,000.
2. Contribute to a Roth 401(k) or 403(b)
Another excellent option for tax-free retirement income is the Roth 401(k) or 403(b). In this case, you’d be able to contribute up to $20,500 for the year 2022. People 50 years and older who are trying to catch up on their savings can contribute up to $27,000.
However, not everyone can take advantage of the Roth 401(k) or 403(b) plan. You may need to speak with a retirement planning specialist to ascertain if your retirement plan lets you contribute to a Roth account.
3. Open a Health Savings Account (HSA)
An HSA lets you enjoy the holy trinity of retirement savings. Your contributions are tax-deductible, the savings accrue interest over the years, and withdrawals may be tax-free. But, just as you’d expect, there are some caveats. You may only save $3,650 as an individual ($7300 for families), with people 55 years and older getting to add an extra $1,000. Also, not all health insurance plans allow you to open or contribute to an HSA.
And for the big one: this account was created as a means to pay for current medical fees, not retirement savings. But you don’t use the funds now. Instead, you could pay out of pocket, letting the HSA grow and earn interest over time. Then on retirement, you pay yourself back for medical expenses you covered in the past – including Medicaid premiums (as long as you keep the receipts).
4. Invest in Municipal Bonds and Funds
Municipal bonds are one of the few investment mediums that let you earn tax-free retirement dollars. However, before you decide to place some money in them, it’s important to do some research and make sure they fit into your overall investment strategy. Similarly, while you are free from federal taxes, some states will charge income taxes on your withdrawals.
Something else to keep in mind: the returns on municipal bonds are lower than what’s obtainable from their taxable counterparts. And they come with certain investment and reinvestment risks, so you may need to consult a retirement planning specialist to get a better overview.
5. Get a Cash Value Life Insurance Policy
A cash value life insurance has a unique attribute. Yes, it lets you contribute to an account that provides your beneficiaries with a lump sum when you pass. However, in addition to that, there’s an investment feature that allows you to save some money, earn interest on it, and withdraw while you’re alive. This is a great option if you’ve maxed out your Roth contributions or are restricted because you’re in a high tax bracket.
Unsurprisingly, your contributions aren’t tax-deductible. But your savings earn interest tax-free, there are no limits to how much you may contribute, and if done right, your withdrawals won’t get taxed. You may also withdraw before you clock 59½ and avoid an IRS penalty.
So, if you’ve been looking for ways to earn retirement income tax-free and within the confines of the law, there you have it. As stated earlier, there are many options, so if one doesn’t work for you or your current financial state, there are 2 to 3 other options you may consider.
But if you find anything confusing and would love some clarity, we have a retirement planning specialist you could talk to. This consultation is free and it comes with no obligation. Just click on the provided link to set up your appointment.
