5 Legal Ways To Get Tax-Free Income For Retirement
By: David Rae - July 04, 2018
No one likes paying taxes. Even with the supposed cuts of the Trump tax plan, I hear people complaining about how much taxes they are paying. But with a little help there are a few ways to get tax-free retirement income.
I help people work toward reaching financial independence. You know, the day work becomes an option. The more taxes you will owe in retirement, the more assets (cash, investments, pensions etc) you will need to have saved to fund your retirement. Marriage can make some of these accounts even more valuable. You may have heard of the marriage penalty, right?
For example, if you are retired and make more than $45,360 combined, 85% of your Social Security is taxable. With this in mind, it can be advantageous to plan ahead for where your retirement assets will be held and how you will take withdrawals to help minimize the tax bite throughout your retirement years.
Here are five ways you can potentially earn tax-free income in retirement:
Roth IRA: Think of this as the starter account. You can put in $5,500 per year ($6,500 if you are 50 or older). You won’t get a tax deduction when you put the money in but the money grows tax free and, most importantly, the money comes out tax free at retirement. While this may seem great to some, the problem is that most people will need to save more the $5,500 per year in order to reach their financial goals. Also, there are income limitations for who can contribute and how much. For example, only couples who earn up to a combined $189,000 each year and singles who make $135,000 or less are able to contribute to a Roth IRA.
If you contributed $5,500 per year from the time you were 22 until you reached the age of 65, and earned 10% each year, you would have more than $3.25 million dollars. If you did that until you were 70, that number would jump to more than $5.25 million. That’s magic of compounding interest at its best, which you could then turn into tax-free income.
Roth 401(k) or Roth 403(b): This can be an excellent feature if your plan allows it. Similar to a Roth IRA, your growth and withdrawals are tax free. The difference is that you have the ability to contribute up to $18,500 per year, as well as a $6,000 catch up if you are 50 years of age or older). You will pay taxes on the contributions but there aren’t income restrictions for these plans.
Article Source: Forbes
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.