How To Get Entirely Tax Free Retirement Income


Tax Deductions For Contributions To Tax

Create A Tax-Free Retirement Income

In general, you will not get tax deductions for these contributions. The benefit of a tax-free account is tax-free growth.

The primary trade-off for that benefitaside from the strict rules that govern tax-free accounts like Roth IRAsis that you do not get a deduction for the initial contribution to the plan and that contribution must be made with after-tax money.

However, there is one type of account that may also be used during retirement that offers upfront tax benefits and tax-free growth of earnings: the Health Savings Account, or HSA. With an HSA, you receive an income tax deduction when you contribute money, but when you use the money in your HSA for medical expenses and qualified health insurance premiums, these distributions come out tax-free.

What’s The Difference Between Tax

With a tax-deferred account, you get an up-front tax deduction for contributions you make, your money grows untouched by taxes, and you pay taxes later on your withdrawals. With a tax-exempt account, you use money that you’ve already paid taxes on to make contributions, your money grows untouched by taxes, and your withdrawals are tax free.

What Is A Retirement Pension Plan

Retirement plans are insurance products that provide monthly income post-retirement. Generally, you pay regular premiums that can be monthly or annual. Once you strike the retirement age, you get a life cover along with a specific amount every month throughout your life.

Insurance companies provide pension plans with or without life cover. Although, people prefer covered pension plans to safeguard their family from the uncertain events of life.

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What About Social Security

Depending on how much you receive from Social Security and your other income, your benefits may be subject to tax yet you may still be able to owe little to nothing to Uncle Sam.

The calculation basically involves adding one-half of your benefits to your adjusted gross income, as well as nontaxable interest . If that amount is $25,000 to $34,000 for a single tax filer , then 50% is taxable. Below that range of income, it’s not taxed if it’s above those amounts, 85% is taxable.

However, even if the calculation results in an amount that is subject to tax, you’d still get to subtract the standard deduction from that. And, if you are at least age 65, you get a bigger standard deduction an extra $1,700 for single filers and $1,350 per person for married couples.

In other words, your deduction or deductions may bring your actual tax burden down to zero or close to it if you do have income that’s taxed.

The Golden Years Guide To Tax

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The earlier you begin socking away savings, the much better off you’ll be in your “golden years.” By using some tax tips, you can end up paying little or no taxes after you retire.

For information on the third coronavirus relief package, please visit our American Rescue Plan: What Does it Mean for You and a Third Stimulus Check blog post.

It’s natural to put off retirement planningthere are families to raise, college tuition to pay, and life to be lived. However, the earlier you begin socking away savings, the much better off you’ll be in your “golden years.” Using some tax tips, you can end up paying little or no taxes after you retire. It’s a very good reason to make solid planning a priorityno matter how old you are.

During retirement, it is critical to monitor your investments and current tax law. You should be positioned to take money from whatever savings or investment ‘bucket’ is most beneficial at the time.Christopher Kimball of Christopher Kimball Financial Services

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What This Means For Early Retirees

Let’s consider a couple that’s 50 years old. They’ve been putting money away in their 401s and traditional IRAs for their entire working lives. That has allowed them to build up a substantial nest egg — say $600,000.

But because they lived a disciplined lifestyle that eschewed things like buying as much house as they could afford, driving brand-new cars, and sending their kids to the most expensive colleges on Earth, they can live comfortably on $40,000 per year now that the kids are gone.

The couple knows that once they are 62, they’ll be able to have all of their needs met by a combination of Social Security and their nest egg. They’ll also be able to start getting that money from retirement accounts starting at age 59-1/2 years old. They just need to bridge the gap between when they retire and when they can tap those sources of income.

They did this by investing any leftover money they had — after contributing to their 401 and IRA — in a regular brokerage account. They bought stocks of solid companies with durable competitive advantages and, in many cases, dividends. In some years they’d have to pay taxes on those dividends while they were working, but not in all years.

Once they quit their jobs, they’ll get the requisite $40,000 in annual income by collecting dividend payments and selling some stocks — and they’ll never pay taxes on any of it.

Which Retirement Income Is Taxed

Besides market risks, taxes can also take a chunk of your retirement income, including your Social Security income. Thats why its important to consider tax-saving strategies, like relocating to a state with low or no income tax or converting savings to plans that offer tax-free withdrawals, like Roth IRAs. Common retirement account taxes to consider ahead of time include:

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Contribute To A Roth Ira

One of the most well-known forms of tax-free income post-retirement is a Roth account. Where a traditional retirement or Roth 401 account taxes your withdrawals, a Roth individual retirement account taxes your contributions instead. This allows retirees who are now in a higher tax bracket to pay taxes before their rate increases. Even those who retire into the same or a lower tax bracket could benefit from a Roth IRA, as traditional and 401 account distributions may push you into a higher income bracket and increase your overall tax burden.

For those keen on early retirement, that money is available whenever you need it, and it will continue to accrue interest until then. Keep in mind that not everyone is eligible to make Roth IRA contributions. Your income may be above the threshold, in which case, there are other ways to build assets in a Roth IRA, such as the Backdoor Roth IRA and Mega Backdoor Roth IRA. These methods essentially allow you to get around the income cap by, for example, contributing to a traditional IRA and then converting that money to a Roth IRA.

If youre interested in contributing to your Roth IRA, tax planning in Mount Pleasant at Morris Financial Concepts can help. While this method is fairly straightforward, its certainly not the only way to increase your tax-free retirement income. Building up your retirement nest egg may involve any number and/or combination of financial strategies.

How Does A Tfra Account Work

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A TFRA is a retirement savings plan that works similarly to a Roth IRA. You pay taxes on the money going into the plan, and the growth on your money is not taxed. However, unlike a Roth, a TFRA does not have Internal Revenue Service-regulated restrictions on how or when you take money from your account.

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Topic No 410 Pensions And Annuities

If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable unless the payment is a qualified distribution from a designated Roth account.

This topic doesn’t cover the taxation of social security and equivalent railroad retirement benefits. For information about tax on those benefits, refer to Topic No. 423 and Are My Social Security or Railroad Retirement Tier I Benefits Taxable?

Invest In Cash Value Life Insurance

Were talking about retirement planning, not legacy planning, so how does life insurance play into the mix? If youre familiar with life insurance or have a policy of your own, you may know that permanent life insurance policies have higher premiums than term life insurance. This is because part of that premium goes toward an accumulation of money called the cash value.

While death benefits still pass to your beneficiaries, the cash value provides a financial benefit for you to use in life. Depending on the policy you choose, the tax-deductible cash value can grow through steady interest, similar to a savings account , or it can be re-invested for potentially higher gains. Your cash value is not subject to capital gains taxes, and withdrawals are tax-free up to the amount you contributed in premiums. You can even take out a tax-free loan against your cash value as long as your policy is in effect.

Cash-value life insurance policies do have their drawbacks. The cash value does not pass on to your beneficiaries unless you buy a supplemental endorsement, and additional withdrawals and loans may reduce the death benefit. Additionally, a wealth of other complexities may be involved in distribution.

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Additional 10% Tax On Early Distributions

If you receive pension or annuity payments before age 59½, you may be subject to an additional 10% tax on early distributions, unless the distribution qualifies for an exception. The additional tax generally doesn’t apply to any part of a distribution that’s tax-free or to any of the following types of distributions:

  • Distributions made as a part of a series of substantially equal periodic payments that begins after your separation from service.
  • Distributions made because you’re totally and permanently disabled.
  • Distributions made on or after the death of the plan participant or contract holder.
  • Distributions made after your separation from service and in or after the year you reached age 55.
  • Distributions up to $5,000 made within a year of the birth or adoption of your child to cover birth or adoption expenses.

For other exceptions to the additional 10% tax, refer to Publication 575, Pension and Annuity Income and Instructions for Form 5329, Additional Taxes on Qualified Plans and Other Tax-Favored Accounts.

Invest In Your Future With A Financial Advisor

After retiring, your taxable income may consist entirely of IRA ...

There is no one-size-fits-all when it comes to retirement planning. Since there are many paths that can lead toward a secure retirement, planning can be tricky to navigate. To speak with an expert who can help maximize your retirement income while minimizing your taxes, reach out to one of Morris Financial Concepts Mount Pleasant financial advisors today.

The opinions expressed herein are those of Morris Financial Concepts, Inc. and are subject to change without notice. MFC relies on information from various sources believed to be reliable, including third parties, but cannot guarantee the accuracy and completeness of any third-party information. The information contained herein is for educational purposes only and is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. The recipient should take their own independent legal, tax and financial advice. MFC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about MFC including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. MFC-21-11.

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Taxation Of Pension Plans

Is the pension income completely tax-free? No! Here is the correct tax treatment of pension plans.

1)Premium Paid under Pension Plans

a) Deferred Annuity & NPS

Section 80CCC of the Income Tax Act provides for the deduction of deferred annuity premiums from your taxable income up to Rs. 1.50 lakhs in every financial year.

b) Immediate Annuity

You are allowed to claim the entire premium paid for this plan as a deduction in the same financial year. This is done to protect investors interest as there is only one lumpsum premium under this scheme.

2)Pension payments post-retirement


You can withdraw 1/3rd of the entire corpus at once after retirement. Tax on this amount is exempt under Section 10 of the Income Tax Act. The 60% commuted pension under NPS is entirely tax-free.

b) Monthly Pension

Tax is levied based on your slab rates for the monthly pension that you earn.

The monthly pension amount that you can earn depends on the size of your invested corpus and the returns thereof. Hence, investing in pension plans early can help you save longer and earn more. Explore the best pension plans online and start planning your retirement now.

What Are Other Ways To Reduce Taxes In Retirement

Aside from investing in tax-free accounts, there are several other ways to lower your taxes during retirement. You can reduce how much you take out, or stop working part-time to lower your tax bracket, for instance. Or you can convert some of your taxable accounts to Roth IRAs to pay taxes while you’re in a lower bracket, then watch them continue to grow tax-free. Talk to an advisor about the best ways to reduce your tax liability in retirement.

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Here Are Five Smart Ways To Have The Most Tax

Roth IRA

Think of the Roth IRA as the starter, tax-free retirement income account. You can put in $6,000, per year, . While you don’t get a tax deduction for contributions, your money can grow tax-free and, most importantly, the money comes out tax-free at retirement.

You may ask, why don’t I put all of my retirement savings into a Roth IRA? The main problem with a Roth IRA is the paltry contribution limits, paired with income limitations. If you are reading this, you will likely need to save more than $6,000, per year, in order to reach your retirement income needs.

If you contributed $6,000 each year from the time you were 22 until you reached the age of 65, and earned 10% each year, you would have more than $3.55 million. If you did that until you were 70, that number would jump to more than $5.76 million. That’s the magic of compounding interest at its best, which you could then turn into tax-free income.

Flip this and say you started at 40 years old, contributing $6,000 every year to a Roth IRA. At 65, assuming 10% returns, you would have $590,000. A nice number for sure, but even without taxes, this wouldn’t produce enough income for average Americans to maintain their standards of living in retirement.

Health Savings Account Distributions

Achieving a Tax Free Retirement

Your health savings account is perhaps the most valuable retirement account you have because it offers you a triple tax benefit.

As long as you follow the IRS rules , youll never pay federal taxes on the money in your HSA. Every contribution you make is tax-deductible, and the money grows tax-free. And as long as you use the money for medical expenses, the withdrawals are also tax-free.

Your HSA account offers another major perk in retirement: no minimum required distribution . You can keep your HSA savings stashed away from year to year until you need to dip into your account to cover medical costs.

The IRS qualifies a wide range of procedures and treatments for HSA payment, so whether you need drug prescriptions, dental care, insulin, physical therapy, surgery, or anything in between, your HSA will cover the cost, which increases your real income a lot.

The NewRetirement Planner allows you to include HSAs as part of your overall plan,

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Military Retirement Pay Income Tax Deduction

If you receive or the spouse of a military retiree receives military retirement income, you will be able to subtract up to $5,000, with an increase to the first $15,000 for individuals who are at least 55 years old on the last day of the taxable year, of your military retirement income from your federal adjusted gross income before determining your Maryland tax. The retirement income must have been received as a result of any of the following military service:

  • Induction into the U.S. Armed forces for training and service under the Selective Training and Service Act of 1940 or a subsequent Act of similar nature
  • Membership in a reserve component of the U.S. armed forces
  • Membership in an active component of the U.S. armed forces
  • Membership in the Maryland National Guard

The benefit also applies to persons separated from active duty employment with the commissioned corps of the Public Health Service, the National Oceanic and Atmospheric Administration, or the Coast and Geodetic Survey.

How To Minimize Your Post

The first step in retirement planning is understanding what your sources of income will be, thenfiguring out how to make them comfortably last. While taxes are a certainty in life, planning ahead can help you strategize which sources of income will minimize your tax burden in the long run. Here are a few ways that you can minimize your financial load:

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Find Out Which Type Of Account Makes Sense For Your Retirement Plan

Kirsten Rohrs Schmitt is an accomplished professional editor, writer, proofreader, and fact-checker. She has expertise in finance, investing, real estate, and world history. Throughout her career, she has written and edited content for numerous consumer magazines and websites, crafted resumes and social media content for business owners, and created collateral for academia and nonprofits. Kirsten is also the founder and director of Your Best Edit find her on LinkedIn and Facebook.

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