Building your retirement nest is difficult and time consuming. Instead, why not increase the amount of money you have available to pay for the things you want or need? You do it with a solid retirement plan that boosts your tax-free retirement income.
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Tax-free retirement income achieves the same goal as a larger retirement savings balance. You end up with more money to spend.
All it takes is thoughtful retirement planning. Your goal: Move money into tax-free income-generating properties. That usually takes much less time than waiting for investments to grow. Likewise, you sometimes qualify by patiently holding a property until the profit from the sale of that property qualifies for tax exemption.
Planning for retirement: Six moves
So here are eight types of tax-free retirement income.
Roth IRA withdrawals. Andrew Schrage, Co-Founder and CEO of MoneyCrashers.com, a personal finance education website. “As long as you follow the Roth distribution rules, you won’t have to pay taxes on the principal, interest, or interest from the account in retirement.”
Your contributions are always tax free and there are no withdrawal penalties. That’s because they’re made with money you’ve already paid income tax on. You can withdraw your earnings without paying income tax or penalty once you are 59 and a half years old and the account is 5 years old.
Leading retirement planning means being aware of exceptions to the 59-1/2 year old and 5 year old account requirements. One of them: You can get away with the penalty but pay no taxes if you use your withdrawal to pay for unreimbursed medical expenses if you’re unemployed.
If you are under 59 and a half years old but the account has been active for more than 5 years, income can be withdrawn tax-free under certain conditions. One of them is that you have become disabled.
No RMD from Roth 401(k)s
Roth 401(k) withdrawals. “Roth 401(k)s have the same tax benefits and withdrawal rules as Roth IRAs, with one important exception: You need to take your RMD after age 72,” says Schrage.
RMDs are required for a minimum distribution. Your first RMD from an IRA must be taken by April 1 of the year after you turn 72. After your first RMD, an IRA RMD must be taken by December 31 of each year. RMD’s rules do not apply to Roth 401(k) accounts.
Also, keep in mind that you cannot contribute to a Roth IRA if your adjusted adjusted gross income (MAGI) exceeds certain levels. In 2022, those limits are $144,000 for single filers and $214,000 for married filing jointly. The amount a person can contribute decreases as their MAGI increases from $129,000 to $144,000. The phased-out range is $204,000 to $214,000 for married joint registrants.
Another retirement planning tip: No limits apply to Roth 401(k) accounts.
Munis in your retirement plan
Municipal bond income. Interest income from municipal bonds is not taxed at the federal level. It is usually not taxed by the issuing state if you live there. But city taxes and other local taxes often apply. “Combined with the relatively stable price performance for senior bonds, this federal tax benefit makes munis popular with retirees looking for reliable, long-term income,” said Schrage. trust”.
The same rules generally apply to interest income from muni bond mutual funds. Likewise, funds that hold only U.S. Treasuries may be exempt from state taxes.
Qualified dividends and capital gains. The main difference to dividends is whether they are “qualified”. This IBD retirement planning article explains what makes dividends qualified.
Qualifying dividends are taxed at 0%, 15%, or 20%, depending on your taxable income and filing status. Unqualified dividends are taxed at ordinary income. Those range up to 37% this year and next.
The 0% rate applies to single filers, such as with taxable income up to $41,675 this year and $44,625 next year. The 0% rate applies to qualified dividends received by married joint registrants with taxable income of up to $83,350 this year or $89,250 next year.
As for capital gains, that income – from property held for more than a year – is taxed at a maximum rate of 20%. However, the 0% rate applies to taxpayers who meet the same income limits that govern their eligibility to receive the 0% rate on qualified dividends.
Short-term interest rates on assets held for less than one year are the same as ordinary earnings rates. Those at the top are at 37% this year and next. There is no 0% rate on short term returns.
Even if you don’t qualify based on income for the 0% rate, your adult loved ones probably won’t either.
Sell Your House
Profits from the sale of your primary residence. “The IRS waives up to $250,000 in capital gains from the sale of your primary residence every two years,” says Schrage. The maximum exemption is $500,000 for married joint filers. “When it’s time to downsize, that can largely offset the price increase of your main home.”
Paying for health care in retirement
Health savings account (HSA) withdrawal. “HSA withdrawals for non-medical expenses are as taxable as regular income after age 65,” says Schrage. “But they’re not subject to the hefty 20% penalty that people under 65 have to pay. HSA withdrawals for qualified medical expenses aren’t federally taxed.”
Withdrawals that you use to pay for other expenses are taxable.
The HSA can keep the money you made your first contribution years earlier, before you retire.
Life insurance money. You have only limited control over receiving money from someone else’s life insurance policy. But you will probably know in advance that you are the beneficiary. In that case, you can do some pre-planning that is potentially profitable. The important fact is: the proceeds of the policy are exempt from federal taxes.
There are also cases where certain income from a life insurance policy is exempt from income tax if you are the policyholder rather than the beneficiary. That happens if you buy the type of policy that returns the premium you paid if you outlive the policy’s term, or cancel the policy before the term ends. Those returned premiums are not taxable, Schrage says. This policy is probably a shared life contract. And the premium that can be returned is sometimes referred to as the refunded premium.
Retirement Planning: Upside To Reverse Mortgages
Reverse mortgage payments. “The IRS treats reverse mortgage income as a loan payment, not as taxable income,” Schrage said. “Just remember that those payments will deplete the equity in your home over time. Those payments can reduce or eliminate any unexpected fortunes that those who have a surplus. Your heirs see if and when they inherit the house.”
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