Finding a savings account that lets you take out income without paying taxes is really the holy grail of retirement planning, and understandably so. In your active years when you can work overtime, put in more time at your business, and exert yourself to increase your income; you can look past how much Uncle Sam is taking out of your paycheck. However, it’s a whole different ball game in your post-work years, when your income is limited and there isn’t enough energy or motivation to boost it.
At this time, you could do with any extra dollar that comes in, and the last thing you want is to be shelling out a bundle to the IRS. Thankfully, there are a number of retirement accounts that let you save and withdraw without paying any taxes, and in this article, we’ll highlight five of them. We’ll also tell you their features, advantages, and disadvantages – so you’ll have all the details you need to make an informed choice.
- Roth IRA
The Roth individual retirement account (IRA) allows you to save from the money that’s left after paying taxes. In return, your savings grow tax-free and when you withdraw after retiring, you do so without paying taxes as well. This means you actually pay taxes before the money is saved in the retirement account, but then it becomes tax-free income when you’re 59 years and 6 months old – provided you’ve had the account running for 5 years before then.
The disadvantage here is that the money you pay into the account is not tax-deductible. However, any returns you earn on the savings will be tax-free along with withdrawals after retirement.
- Roth 401(k)
A Roth 401(k) is quite similar to a Roth IRA, with the major difference being that the 401(k) is sponsored by an employer. The contributions are also made after tax, any amount saved is allowed to grow tax-free, and withdrawals are not taxed. However, there are some differences. For instance, the Roth 401(k) doesn’t come with income limits like the IRA which restricts people who earn over a certain amount from contributing.
On the other hand, because the 401(k) is managed by employers, the range of investment options are often limited when compared to the IRA. In summary, though, it offers a good way to earn retirement income with zero taxes charged.
- Fixed Index Annuities
Fixed index annuities can be best likened to an insurance contract that guarantees a certain amount is paid back to the participant in the future – if they make contributions to an account in the present. Now, an annuity is different from the other retirement accounts on this list because it allows for the possibility of paying no taxes before contributing to the account, and also while withdrawing from it in the future.
Another factor that makes a fixed annuity so interesting is that the principal amount is protected during periods of negative stock market performance – this is particularly relevant given the current economic environment. However, as good as it sounds, fixed index annuities also have weaknesses. And it is essential that you discuss with a professional and get a full overview before investing in it.
- Municipal Bond Fund
Municipal bonds are issued by state and local governments, and they offer tax-free interest payments to investors. The interest earned on these bonds is exempt from federal taxes and sometimes state and local taxes, depending on where the bond was issued. This can be an attractive option for investors who are looking for tax-free income in retirement.
- Permanent Life Insurance
Permanent life insurance policies are designed to provide a death benefit to beneficiaries in the event of the holder’s passing. However, they can also offer significant tax benefits for retirement planning. After some years of holding the policy, it generates something called cash value, and this can be withdrawn tax-free. Furthermore, the policy’s death benefit is typically paid out tax-free to beneficiaries after the plan owner passes away.
In conclusion, there are several retirement accounts available that reduce your tax burden. By choosing the right type of retirement account, you can minimize your deductions and maximize your retirement savings. No matter which of the above you choose, it’s essential to consider the secondary implications of each option and select the one that best fits your retirement goals and financial situation.
To provide expert guidance, we have a retirement planning specialist available to address any concerns you may have. All you need to do is follow this link and book an online appointment. It’s free of charge or obligation.
