Tips to Maximize Your Tax-Free Income in Retirement

​Often in retirement planning, much of the focus is on asset accumulation. No doubt it’s important to save and grow your money so you’ll have a sizable nest egg when you retire. However, it’s also important to minimize expenses in retirement. The higher your spending is, the harder it may be to make your savings last throughout your retirement years.

Taxes can often be one of the biggest expenses people face in retirement. Many retirees face taxes on almost every source of retirement income, from Social Security and pension benefits to retirement account distributions and more. By planning ahead, however, you can take steps to help minimize your tax exposure.
 
Below are four potential ways to generate tax-free income in retirement:

Contribute to a Roth IRA.
You may be more familiar with the traditional IRA, as it’s one of the most popular types of retirement savings vehicles. A traditional IRA offers the benefits of tax-deductible contributions and tax-deferred growth but requires you to pay taxes on all distributions.
 
With a Roth IRA, your contributions aren’t tax-deductible, but you still benefit from tax-deferred growth. Perhaps most important, a Roth allows you to take tax-free withdrawals in retirement after age 59½.
 
By contributing to a Roth IRA now, you have the ability to create a source of tax-free income to enjoy later in your retirement. If you currently have a traditional IRA, you might consider doing a Roth conversion, which will move your traditional IRA funds into a Roth account.

Utilize cash value life insurance.
It may be possible to use your life insurance to generate tax-free retirement income. With cash value insurance, also known as permanent insurance, the cash value grows tax-deferred inside the policy. This kind of insurance comes in a variety of policy types, such as whole life, universal and variable, and each has its own features and benefits.
 
Essentially, though, cash value insurance allows you to withdraw your premiums tax-free. Then, once you’ve withdrawn all your premiums, you can take out your growth as tax-free loans. Since those distributions are technically considered “loans,” they must be repaid at some point. If you don’t repay them while you’re alive, the balance is deducted from the death benefit after you pass away.

Consider municipal bonds.
Municipal bonds are bonds issued by state governments, municipalities and other nonprofit entities, like hospitals or public works departments. They issue these bonds to raise capital for operations and for major projects.
 
They’re often appealing because there’s generally no federal income tax on the interest for municipal bonds. You have the option to buy individual bonds or mutual funds that specialize in municipal bonds. Be aware, though, that if you sell a bond for a gain on the secondary market, that gain could then be taxable.

Contribute to a health savings account (HSA).
While it won’t provide you with general income that you can use for any purpose, an HSA does provide tax-free income to cover medical expenses. It can be a helpful financial tool that may help you manage out-of-pocket medical costs.
 
With an HSA you can make deductible contributions and allocate your funds across investments that align with your goals and risk tolerance. Any growth is tax-deferred. This type of account will allow you to take tax-free withdrawals to pay for qualified medical costs, which may potentially be a significant source of expense in your retirement.
 
Ready to plan your tax-free retirement? Let’s talk about it. Contact us at Fenton Financial Services. We can help you analyze your needs and develop a strategy. Let’s connect soon.
 
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
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