Retirement Approach Free Of Tax


Is There Such Thing As A Tax Free Retirement

Tax Efficiency in Retirement

Im going to sell my house and buy a condo on the beach!

Im going to buy my dream car!

Were going to travel the world!

Big retirement dreams. We all have them. Generally, they involve spending the money we will spend our working years saving up, so we can enjoy retirement to the fullest.

Dreaming about what well do with all that free time can be a lot of fun.

Alas, the actual process of setting up a solid retirement strategy can seem like an overwhelming challenge. After all, tomorrow isnt promised, let alone an idyllic future that may be years away.

Someday, most of us will make it to the finish line we call retirement. Well be proud of ourselves for having done the best we could to plan for our anticipated income and expenses so we wont outlive our money.

Saving money consistently throughout our working lives requires self-discipline. It takes a serious commitment and a good financial advisor to pull it all together. Even so, there are outside forces that we cant control like the ever-changing tax code. So how are we supposed to plan for those?

Some Hard Facts:

  • The current US tax code is currently approved for just five more years: through the year 2025.
  • The national debt is rising at an alarming rate 36% faster than the economy,* in fact and is unsustainable.

In our country, as in our households, the burden of carrying lots of debt is the more significant issue, since there are only two ways to fix that problem.

  • Cut expenses or
  • Make more money
  • Helping Clients Develop A Healthy Approach To Retirement Savings

    The past few years have been a roller coaster ride for many retirement savers. After performing well for several years, the broader investment markets have been hit hard since the beginning of 2022. Now the price of gas, food, housing, and other goods and services continue to rise, and for many of us, something needs to give.

    But that something shouldnt be your retirement savings.

    Still, many Americans have been hit hard in the pocketbook by the pandemic and other economic stressors. Financial insecurities have led to decisions to take plan loans or IRA distributions, with some reducing or stopping contributions to retirement savings altogether. Others are considering delays in retirementor even abandoning their hope of retirement altogether. These conditions may also lead your clients to ask for savings withdrawals.

    The 2022 T. Rowe Prices Retirement Savings and Spending Study, an annual study conducted since 2014, reported the following pandemic effects on retirement in 2020.

    Another study reported that the average personal savings amount dropped 15 percent from $73,100 in 2021 to $62,086 in 2022. There is a bright side, however: of those respondents, 60 percent said that the pandemic has encouraged them to build up their personal savings 10 percent said theyve rebounded financially and now are ahead of where they were pre-pandemic 12 percent said they are fully back on track.

    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.

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    Roth 401 Or Roth 403 For Tax Free Retirement Income

    The Roth option can be an excellent feature if your employer’s retirement 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 $19,500, per year, as well as a $6,500 catch-up . You will pay taxes on the contributions, but there aren’t income restrictions for these plans.

    Even if you started late and contributed $26,000 each year to a Roth 401k, you could become a millionaire. Assuming 10% net returns, the 401 could grow to $1.49 million by age 70.

    Municipal Bonds and Funds

    Muni Bonds are the most investment-specific of these tax-free income options. You will need to decide if these bonds fit your investment needs. The short overview is that income distribution from these bonds is not subject to federal income taxes, but they may still be subject to state income taxes. For this reason, the interest rates these bonds pay are generally lower than that of taxable bonds. These bonds also have various investment and reinvestment risks, especially now that we are in a rising rate environment.

    Tax Season is a reminder to look at the amount of Tax-Free income you can recieve in retirement.

    Health Savings Account

    Biden Tax Law Changes may make tax-free retirement income even mor valuable in the future.

    Cash Value Life Insurance

    Do I Need To Think Differently About Taxes In Retirement

    Charting Your Course Through Retirement

    When you retire, income you receive may be taxed differently than when you were working.

    Taxes in retirement are different because you’re drawing on savings and investments. Your new set of rules can vary widely and could be more complex.

    Why? Because many contributions to Individual Retirement Accounts grow on a tax-deferred basis. So, once you begin taking distributions, you’ll likely owe taxesboth on your earlier pre-tax contributions and on any earnings.

    Taxes in retirement are different because you’re drawing on savings and investments.

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    Give Your Distribution To Charity

    The rules around Qualified Charitable Distributions generally allow individuals age 70½ or older to make a QCD of up to $100,000 per year directly from their IRAs to an eligible charitable organization.4

    QCDs can be counted toward satisfying RMDs for the year if certain rules are met. However, if an individual makes a tax-deductible contribution after age 70 ½, the amount the individual can exclude from their taxable income as a QCD will generally be reduced. Keep in mind that, for an IRA distribution to qualify as a QCD, it must satisfy certain requirements . Make sure to work with your tax advisor to ensure that you satisfy all the QCD requirements and that QCDs have been correctly reported on your tax return.

    What To Ask Retirement Wealth Advisors

    Having someone to help achieve the goal of a retirement approach free of tax is necessary to find the legal avenues to take advantage of current regulations. Dont shy away from asking advisors questions to determine the best fit. Consider asking the following questions:

    • How do wealth advisors make money?
    • Is your wealth advisor currently involved in any legal or regulatory matters?
    • Where are the investments held?
    • How does your wealth advisor manage a retirement portfolio?
    • Does your wealth advisor offer financial planning?
    • What are the risks of retirement?

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    What Is An Rmd And How Does The Rmd Tax Penalty Work

    A required minimum distribution is the minimum amount you must withdraw annually from your retirement account when you are age 72 and older. It is recalculated each year. If you do not take a distribution or if you withdraw less than the required amount, you may have to pay a penalty equal to 50% of the amount not taken. Being aware of this ahead of time can help you avoid the penalty.The simplest approach for many individuals is to take the first RMD by Dec. 31 in the year they turn age 72 and continue RMDs by Dec. 31 every year after that. You can take more than the required amount and people often do so. While the extra withdrawals dont count toward RMDs for future years, they do reduce the base amount from which future RMDs are calculated.Roth IRAs are exempt from RMDs while the owner is alive, but Roth 401 and Roth 403s do have RMDs unless they are rolled over to a Roth IRA.

    How Does The Raft Strategy Work

    Achieving a Tax Free Retirement

    There are three ways to gain tax-free income: Municipal Bonds, Roth IRAs, and Tax-Free Insurance Contracts.

    Municipal bonds are most appropriate for those in the highest tax brackets. Typically the gains on these types of investments are lower than most investors need for their portfolios. Roth IRAs can be a great retirement option for tax-free income, but there are limits on contributions and regulations on distributions. Also, the IRS restricts how much you can contribute annually and requires earned income in order to make a contribution . Regular distributions may also be penalized before age 59 ½.

    The RAFT Strategy provides minimal contribution limits and has two options for investing. The investor can choose annually either the fixed interest rate option or follow a specific index, such as the S& P 500. When the investor chooses to follow an index, their account will participate in a percentage of the gains of that index, yet when the index falls, the investor will not lose based on negative markets.

    The way to generate tax-free income from these programs is to obtain an interest-free loan from your contract. You will not pay income tax on the money borrowed and you will not have to pay back the loan balance during your lifetime. This is pertinent to tax codes 7702 and 72.

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    What Is A Tax

    A tax-free retirement account or TFRA is a type of long-term investment plan thats designed to help minimize taxes on retirement income. A TFRA retirement account is not a qualified plan so it doesnt follow the same rules as a 401. But it can offer both tax benefits and risk protection for investors. Breaking down how a tax-free retirement account works can help you to decide if this strategy may be right for you. A financial advisor may also be able to help you determine if a TFRA is right for you. Try using SmartAssets free advisor matching tool today.

    You Dont Have Access To A 401 Plan At Work

    Your workplace may not offer a retirement plan at all. Some employers have a waiting period before someone is eligible to participate. Or the plan might only be available to full-time workers.

    If this is your situation and the only retirement account option is in an IRA, contributions are limited to $6,000 per year in 2022 . For many workers, an IRA by itself will not get you to that 15% savings rate. Making additional contributions to a taxable account can help you meet this savings target.

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    Consider A Roth Ira Conversion

    Some individuals can’t contribute directly to Roth IRAs if their income exceeds certain limits set by the tax code, but they may be able to convert a Traditional IRA to a Roth IRA. The taxable amount converted is subject to ordinary income tax for the year the conversion is made but provides future federal tax-free growth potential. This strategy may work for taxpayers who will not need to take distributions from their Roth IRA during retirement and plan to leave their account to their children. Keep in mind, however, that such a conversion in 2022 may increase your adjusted gross income for 2022.

    Plan Ahead To Optimize Your Tax Strategy In Retirement

    Charting Your Course Through Retirement

    When thinking about your future retirement, you have several factors to consider. In addition to understanding the different types of income youll haveSocial Security or pension, retirement accounts, and other assetsand the tax rules that apply to each one, its important to consider how these income streams will work together. Required minimum distributions or other factors may cause your tax bracket to change during retirement, and you want to avoid sudden tax shocks. Making a plan for tax efficiency, including when and how to draw on your various assets in retirement, can have a big impact on how much youll owe the IRS from year to year.

    In this article well talk about:

    • 3 key decisions most retirees need to make.
    • The advantage of having diverse account types, or strategic asset location.
    • Tax smoothing versus paying zero taxes in a year.

    Most investors have 3 categories that make up the foundation of their retirement savings: 1) Social Security or a pension plan, which you can think of as nonportfolio income 2) a portfolio of taxable nonretirement assets and 3) retirement-specific assets with tax advantages. As well discuss, you may choose to move these to a different type of account if it works in your favor.

    These are the 3 levers available to the average American retiree, says Vanguard Senior Research Specialist Hank Lobel, and probably the 3 most crucial things youll need to consider from a tax standpoint.

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    Legal Ways To Get Tax

    Will more tax free income for retirement put a big smile on your face?

    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 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:

    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. Thats magic of compounding interest at its best, which you could then turn into tax-free income.

    Pension Income And Annuity Distributions

    According to the IRS, 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 doesnt apply to any part of a distribution thats tax-free or to any of the following types of distributions:

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

    One way to avoid paying taxes on your pension income is to have your taxes withheld directly from your pension check.

    Also, the interest portion of your annuity will be included in your taxable income. Youll also pay taxes on earnings or investment gains.

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    Avoid Or Postpone Rmds

    If you are at least 72, you do not have to pay tax on required minimum distributions from your traditional IRA if you transfer the funds to a charity. The RMD used to be 70½, but following the passage of the Setting Every Community Up For Retirement Enhancement Act in December 2019, it was raised to 72. Heres whats required:

    • Your IRA trustee or custodian must transfer the funds directly to an IRS-approved public charity.
    • You must receive a written acknowledgment from the charity as you would for a charitable contribution.

    There is a $100,000 annual limit for this strategy. If you are married, each spouse has a separate $100,000 limit. This strategy can only be used for IRAs, not IRA-like accounts such as or SIMPLE IRAs.

    Roth IRAs are not subject to RMDs.

    Required minimum distributions for traditional IRAs and 401s have been suspended in 2020 due to the March 2020 passage of the CARES Act, a $2 trillion stimulus enacted amid the economic fallout from the COVID-19 pandemic.

    Tax Efficiency In Retirement

    How to use tax-free income vehicles to plan for retirement

    Being a tax-efficient investor is important, but it may matter the most once you hit retirement, which is when youll want to maximize your savings to make them last as long as possible.

    Lets look at two tax-efficient ways to withdraw assets from your accounts once you enter retirement: The Traditional Approach and The Proportional Approach. In general, there are three types of retirement accounts that investors use to save: Taxable accounts, like your brokerage account, Tax-deferred accounts, like a traditional IRA or 401, and Tax-free accounts like a Roth IRA.The order that you withdraw from these accounts can help you limit the taxes youll pay, and keep more of your money working to extend the life of your assets.

    The Proportional Approach to retirement withdrawals has the potential to offer some additional benefits. With this approach you take withdrawals from both your taxable accounts and your tax-deferred accounts proportionally, based on the account balances, and leave your tax-free Roth IRAs alone to hopefully continue to grow as long as possible.This withdrawal strategy has the potential to help spread out your taxable income more smoothly in retirement and can help to reduce the spike in income caused by RMDs, which can help reduce the total taxes paid over your retirement.

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