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The 4 Tax-Free Retirement Strategies

One of the most important goals of any retirement strategy is to make sure that you have financial stability in the future even if you are no longer working. The key to this is to lower your expenses in retirement as much as possible and have a tax-free retirement.

One of the biggest expenses that most retirees face is taxes. You will likely be required to pay taxes on retirement account distribution, pension benefits Social Security and more. These significant tax bills often take many people by surprise and can critically affect your savings for retirement.

You can, however, minimize your exposure to tax and plan ahead to protect your retirement security. With the use of tax-free retirement strategies, you will be able to keep more of your hard-earned income for retirement instead of giving it all away as taxes.

 

4 tax-free retirement strategies

Try to consider these 4 tax-free retirement strategies listed below:

 

Cash Value Life insurance

 

Sometimes called as ‘permanent insurance’, a cash value life insurance has a number of various insurance types such as a variable, universal or whole life. Each type has its own set of benefits and features; however, the main advantage is that your cash value will grow tax-deferred.

Cash value life insurance allows you to withdraw a tax-free premium and then take the growth out as loans that are tax-free. After you retire, you can also use your cash value life insurance policy as a source of supplemental income that is tax-free. Keep in mind, however, that if there are any loans that are not paid, it will be deducted right from the death benefit after you die.

 

Roth IRA

 

Traditional IRAs are popular retirement savings due to the fact that it allows tax-deductible contributions and offers a tax-deferred growth. However, all distributions from this account type are taxable and can be problematic for most retirees.

A Roth IRA, on the other hand, has upfront contributions that are not tax-deductible, however, you can still benefit from the fund’s tax-deferred growth inside the account. However, the major advantage of a Roth IRA is that it allows you to make tax-free withdrawals after you have reached the aged of 59 and a half.

To save for retirement, you should consider a Roth IRA, since it would create a source of tax-free income for you in the future. In case you already have a traditional IRA, you can have a Roth conversion in order to convert your traditional IRA funds to Roth IRA funds. However, you need to pay taxes on the converted amount, but that it would be worth it as it reduces your retirement’s tax liability.

 

Health Savings Account

 

Technically, HAS or Health Savings Account is not a source of tax-free income which can be used for a general purpose. However, it can be used to create a tax-free income in order to cover medical expenses. HAS exists especially for this purpose and it is very beneficial when it comes to covering costs for your health on your retirement.

You can make contributions that are tax-deductible with an HSA which can grow tax-deferred as long as it stays in the account. You will be then eligible to make tax-free withdrawals in order to pay for any qualified medical costs.

You might want to think about making HSA contributions as an important step of your retirement saving strategy, considering the cost of healthcare today.

 

Municipal Bonds

 

And lastly, the 4th on the list of the tax-free retirement strategies, a variety of nonprofit and local governmental entities like public works departments and hospital, issue municipal bonds in order to raise capital. The interest of such bonds is paid to the bondholder, tax-free. You can either buy them as mutual funds which specialize in municipal bonds or as individual bonds.

Keep in mind however that if you sell a bond for your gain, then it could be taxable.