When planning for retirement, there can be a lot of uncertainty. After all, you never know what the future may hold — tax rates included. Fortunately, there are ways you can remove income taxes from the equation. Let’s take a look at how you can create tax-free income for retirement:
Fund a Roth IRA
You can consider a Roth IRA the starter tax-free retirement income account. You can put up to $6,000 per year — a thousand more if you are 50 or older. While you won’t get a tax deduction for contributions, your money grows tax-free and comes out tax-free at retirement. However, due to contribution limits and income limitations, you can’t simply put all of your retirement savings into a Roth IRA. You will likely need to save well beyond $6,000 per year to reach your retirement income needs.
Roth 401(k) or 403(b)
The Roth option can be a great feature if your employer’s retirement plan includes it. Like a Roth IRA, your money’s growth and withdrawals are tax-free. The difference lies in your ability to contribute up to $19,500 per year and a $6,500 catch-up if you are 50 or older. You will pay taxes on the contributions, but there are no income restrictions for these plans.
Life Insurance or Annuities
Most people may not think of life insurance as part of their retirement plan. Some believe it isn’t necessary for retirement at all. However, this can be an excellent tool to secure financial freedom if you are married, have kids, maxed-out your contributions to other retirement accounts, or are in a higher tax bracket. You can set this account up like a Roth IRA; without income or contribution limits. You will not get a tax deduction for your premiums, yet the money will grow tax-free. These accounts are exempt from incurring IRS penalties for withdrawals made before your reach 59 ½. This can be a huge plus for individuals looking to retire early.
Annuities, too, can provide an income stream for retirement. If you use after-tax money to fund an annuity, only the interest is taxable. However, there are myriad annuity types, and they can be more expensive than alternative income-stream options.
States, counties, and cities issue municipal bonds to fund public projects. Income distribution isn’t subject to federal income taxes, although it may still be to state income taxes. The interest rates these bonds pay skew lower than that of taxable bonds. Municipal bonds have various investment and reinvestment risks.
Health Savings Account (HSA)
With a Health Savings Account (HSA), you can receive a tax deduction for contributions, growth, and withdrawals. You must have the appropriate type of health insurance to use an HSA, and investment options may be limited.
This account is designed to pay for current medical expenses, but you don’t have to pay for them immediately. You can hold the HSA until retirement, with the funds growing and compounding along the way. Then, you could reimburse yourself for all medical expenses paid, including Medicare premiums.
Get in Touch With Malibu Wealth Planning Today
It’s crucial to be proactive and develop a plan to attain your financial goals — a comfortable retirement income stream being no exception. For more information about paying the fewest taxes on your savings as you approach retirement or our services — including income planning and tax planning — contact us today.