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5 Forms of Non-Taxable Retirement Income

5 Forms of Non-Taxable Retirement Income

November 08, 2022

Because you will likely be living on a fixed income in retirement, you want to minimize the impact of any “surprises” at this time of life. For some retirees, income taxes can come as a major shock. Yes, income taxes are still a very real part of life, even after your working years are over!

Estimating your annual income tax debt, and paying those taxes throughout the year, is one way to avoid a potential unpleasant surprise in the spring. But another way to prepare for income taxes in retirement is simply to establish non-taxable income. We have about five ways of doing that, depending upon your exact situation.

Save for retirement using a Roth account. A Roth IRA or 401k allows you to save after-tax dollars during your career, and then enjoy non-taxable withdrawals from that account in retirement. The accounts otherwise work in a similar manner to traditional IRAs or 401k accounts.

Purchase municipal bonds. Sometimes, as a way of funding public projects like roads and schools, city or state governments will sell municipal bonds that allow citizens to invest in their communities. You later earn interest on that investment, which is considered non-taxable by the federal government and some states.

Enroll in a life insurance policy. The cash payout from a life insurance policy is non-taxable, so this is one way to establish income for your surviving spouse in the future.

Stash money in a health savings account. Technically, withdrawals from a health savings account aren’t “income”, but they can be used to pay for qualified medical expenses. Start saving money in a health savings account now, allow the money to roll over each year, and take the funds with you into retirement. At that point you can use the money to pay for Medicare premiums, copayments, deductibles, and other healthcare expenses.

Strategize your Social Security benefits. Technically, Social Security benefits can be taxable when your overall taxable income rises above certain thresholds. But if you strategize your Social Security income by combining those payments with other forms of non-taxable income, you can potentially stay below those limits and keep your Social Security income free of taxation.

If you’re concerned about the impact of income taxes in retirement, call us to schedule an appointment. We can discuss your individual situation in more detail, and help you identify the solutions that could work for you.