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How to Earn Tax-Free Income in Retirement

The truth is that tax will always be charged on your income – there are some exceptions to this rule, but for most people, the statement stands. Now, the important thing is: do you want tax deducted before you contribute to your retirement account or after. Simply put, do you want to pay taxes while you still have the protection of your monthly paycheck OR do you want this deduction to come out of your retirement income, at a time when your tax rate may be lower. 

How to Earn Tax Free Income in Retirement

If the first option is your preference, then continue reading. We’re about to highlight a number of ways you can earn tax-free retirement income. The first one is the most popular. 

Contribute to a Roth IRA, 401K or 403b

You can either make individual contributions to a Roth IRA or your employer could contribute on your behalf to a Roth 401(k) or 403(b) account. Either way, these retirement accounts are funded with after-tax dollars, meaning you no longer have to pay taxes on them when you’re taking payments. The main reason this is great is because any interest you earn on the account over the years is also protected from taxes – as long as you meet the eligibility requirements. So, say you start your retirement planning early, you can earn thousands of dollars in interest, and it’s all tax-free. 

Invest in Municipal Bonds

Another way to ensure tax-free income after retirement is to invest in municipal bonds. These types of investment products are issued by state and local governments, and they are regarded as one of the safest bonds (note that their ROI is usually quite low). When the bonds mature, you can take out your initial investment + profits without paying federal taxes. One needs to be careful though, because you may still be subject to state taxes or an increase in taxable Social Security income. 

Take Out a Life Insurance Policy

There are many different classes of life insurance policies, and some of them allow the plan holders to withdraw from their account while still alive. A cash value life insurance policy makes it possible to build up a cash value over time. This amount can be withdrawn tax-free even if the plan owner is still alive – subject to some requirements. And of course, this option makes it possible to kill two birds with one stone, i.e., access retirement income if there’s a need for it and some years down the line, leave behind a legacy for beneficiaries. 

Leverage a Fixed Index Annuity

The final option we’ll be looking at is the fixed-index annuity. This is a type of insurance contract between an individual and a financial services provider. The individual agrees to make a lump sum or periodic contribution in the present, and when they retire, they get tax-free income from the financial service provider. Furthermore, the money being contributed by the account owners is invested in a stock market index, allowing it to earn interest over the years. 

The best thing about this account is that some of them offer principal protection, so even if the stock market has a bad year, your portfolio doesn’t lose money. It’s important to note however that interest earned may be subject to taxes, but the principal itself remains untaxed.

Final Note

In conclusion, if you’re looking to set up a way to earn income in retirement without having to pay taxes on it, there are several options you can look at as shown above. As we always say though, your decision in the end will be based on your current financial reality, future goals, and personal preferences. If you need any help making a decision, you may talk to our resident retirement income + tax specialist. Schedule a quick AND FREE consultation now via this link ⇒ Book a meeting

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