These strategies can help you earn tax-free retirement income

Of course, no one likes to lose any of their income with Uncle Sam.

The aversion may be most pronounced in his golden years. If you leave the job completely behind, any amount due to the IRS will come out of your income and retirement savings, both intended to last another 20 or 30 years.

However, there are strategies you can implement to minimize or eliminate your tax bill, which translates into more money you have left. Of course, getting there involves getting a little ahead of time.

“To generate, periodically, tax-free revenue over a long period of time, a lot of planning needs to be established,” said Avani Ramnani, certified financial planner, CEO of Francis Financial in New York.

For example, if you want your retirement savings to generate $ 100,000 in tax-free retirement income per year and you want to adhere to the so-called 4% annual withdrawal rule – a fee intended to last your money in at least 30 years: you’ll need at least a $ 2.5 million portfolio.

Of course, your own annual cash flow needs for your nest egg can be over or under $ 100,000. And you may need to use a combination of strategies, depending on the data in your situation.

If you can save money on a Roth version of an individual retirement account or a 401 (k) plan, you could set yourself up for a fairly simple way to get tax-free income.

While your contributions are not tax deductible, as they can happen with a traditional IRA or 401 (k), distributions made from these accounts after the age of 59½ are generally tax-free.

“The best way to end tax-free income is to pay taxes first, and the best way to do that is to contribute to [a Roth account] throughout your years of work, ”said Police President George Gagliardi, founder of Coromandel Wealth Management in Lexington, Massachusetts.

The maximum you can contribute in a year to a Roth IRA is $ 6,000 ($ 7,000 if you’re 50 or older). However, that amount begins to gradually disappear with income of $ 125,000 for a single taxpayer and $ 198,000 for married couples filing a joint tax return and disappears with income of $ 140,000 (for singles) and $ 208,000 ( couples).

Roth 401 (k) accounts are more generous: there is no income limit and you can contribute up to $ 19,500 by 2021 (plus $ 6,500 more if you’re 50 or older).

There are ways to circumvent the Roth IRA income limit. For example, you can contribute to a traditional IRA and turn the money into a Roth. There may be conversion taxes, but you will not pay any tax on road distributions.

If you have access to a health savings account, which can only be combined with a highly deductible health plan, it can be used as a way to generate tax-free retirement income.

Unlike the similarly named flexible health expense account, you will not have to spend HSA money in a given time frame.

HSA contributions are tax deductible, earnings on the account grow tax-free, and withdrawals that are used to pay for qualified medical expenses are also tax-free and penalty-free. (At age 65, withdrawals can go to anything without paying any penalties, although if the money is used for non-medical expenses, they would be subject to taxes).

You can contribute $ 3,600 to an HSA in 2021 ($ 7,200 for family coverage). If you are 55 or older, you can deposit an additional € 1,000.

These bonds are issued by states, counties, cities and the like to fund public projects. And, the interest you get from so-called munis is generally not subject to federal taxes. If the bond is issued in your state of residence, you may also be tax-free at the state level.

However, “if you buy munis for a state where you don’t live, you would have to pay state income taxes,” Ramnani told Francis Financial.

So, for example, if you live in New York and buy bonds issued in California, you’ll have to pay a state income tax, Ramnani said.

There may also be certain cases where municipalities are subject to federal taxation, so it’s important to know the rules before assuming your earnings are tax-free.

Any return on an investment held for more than one year is considered long-term and is generally taxed as such. (Otherwise, it is taxed as ordinary income.) The same goes for qualified dividends.

For long-term earnings, the tax rate depends on your income. If you are an income taxpayer with incomes of up to $ 40,000 ($ 80,000 for married couples filing jointly), the rate is 0%. If you can keep your income below these thresholds, those gains can be tax-free income.

Keep in mind, however, that taxes are only a consideration when it comes to retirement investment strategies.

“You have to think about portfolio allocation,” Ramnani said. “Are you assigned in a well-diversified manner and in accordance with your risk tolerance and your goals? There may be competitive goals or considerations.”

Although permanent life insurance policies usually have much higher premiums than term life insurance, part of the reason is the savings aspect of these policies.

“The idea is for you to pay these high premiums and for some to go to insurance and the other part to go to a savings and investment deposit,” Ramnani said.

According to the details, these so-called cash value life insurance policies can be used to generate non-taxable retirement income, said Michael Resnick, CFP, senior adviser on wealth management at GCG Financial in Deerfield. Illinois.

“But there’s some extra complexity when it comes to distributing, so caution should be exercised,” he said.

Similarly, annuities can provide an income stream during retirement. If you use after-tax money to finance one, only interest is taxable, in general. However, there are many different types of annuities and they can be more expensive than other income stream options. And, once the money is handed over to the insurance company that sold you the life annuity, it can be difficult to get it back after a brief review period.

Depending on the contract, you can pay what is called a delivery charge if you no longer want the annuity or withdraw more than allowed. This commission can be quite strong, especially during the early years of the contract.

Depending on how much you receive from Social Security and your other income, your benefits may be subject to tax, although you may not be able to owe anything to Uncle Sam.

The calculation basically consists of adding half of your profits to your adjusted gross income, as well as non-taxable interest (i.e., good muni). If this amount is $ 25,000 to $ 34,000 for a taxpayer ($ 32,000 to $ 44,000 for married couples filing jointly), 50% will be taxable. Below this income range, it is not taxed; if it exceeds these amounts, 85% is subject to taxes.

However, even if the calculation translates into a taxable amount, you should subtract the standard deduction ($ 12,550 for singles and $ 25,100 for married couples, in 2021). And, if you’re at least 65, you’ll get a larger standard deduction – an additional $ 1,700 for singles and $ 1,350 per person for married couples.

In other words, your deduction or deductions can reduce the actual tax burden to zero or approximate it if you have taxed income.

Of course, there are types of additional income that could reach your retirement and not be subject to taxes.

For example, if you divorce, alimony (spousal support) is not taxed on the beneficiary if the divorce occurs after 2018. Also, if you receive a gift from, say, a family member, it will not be taxable.

The same goes for life insurance income if you are the beneficiary of the policy. And, any profit from the sale of your main home usually includes an exclusion: up to $ 250,000 is exempt if you are applying for taxes and $ 500,000 for married couples filing jointly.