How to Get More Tax-Free Income in Retirement

How to Get More Tax-Free Income in Retirement
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Mike Valles
11/27/2023
Updated:
11/27/2023
0:00
Paying taxes during your retirement years can significantly reduce your retirement income. Finding ways to eliminate most of them can make your retirement more comfortable. Here are some ways you can reduce your taxes by using tax-free income.

Deposit Retirement Money Into a Roth Account

One of the best ways to save for retirement is to have the money automatically deposited into your employer’s retirement plan where they offer matching contributions. This method enables you to build your retirement savings faster.

It would be even better if the employer offered a Roth 401(k) or a Roth IRA account, but not all employers offer them. Contributing money to a traditional 401(k) or IRA will let you take home more money now, but you will have to pay taxes when you withdraw the money—when you will likely be in a lower tax bracket.

Depending on how much money you intend to contribute to a retirement account annually will determine whether a Roth IRA or a Roth 401(k) is better. The contribution limit on a Roth IRA in 2023 is $6,500 unless you are 50 or older—then you can contribute up to $7,500. The contribution limits for a Roth 401(k) are much higher—$22,500 per year, but if you are 50 or older, you can contribute an additional $7,500.

A Roth account is a better choice for most people, but you must pay taxes on the money before putting it into your retirement account. When you pay taxes now, you can withdraw the money in retirement tax-free, which lets you get larger amounts when you need it most. Another excellent benefit of putting money into a Roth account is that they have no required minimum withdrawals (RMDs).

Make a Roth Conversion

You can convert money from other retirement accounts to a Roth account. When you make a Roth conversion, you must pay taxes on all converted money. To avoid a massive tax bill all at once, you can convert some of your money over several years. All conversions and contributions must still follow the maximum allowable contribution limits.
If you plan to use the money from a Roth account when you retire, there are some rules about withdrawals you should know. A tax-free withdrawal, Schwab says, can only be made after the money has been in the account for five years, or you will have to pay penalties. It means that you should not wait to make the conversion right before you plan on retiring.

Move to an Income Tax-Free State

Another way to get a boost in your retirement income is to move to a state that does not tax retirement income. Some states will even tax your Social Security income, but others may only tax income received from a 401(k) or individual retirement account (IRA), and some will tax pension payments. Income from brokerage accounts may also be tax-free.
Finance.Yahoo notes that these eight states do not have any income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Before moving to one of these states, you should know that some of them make up for lost revenue from income taxes with higher sales and property taxes. Count the cost of moving, buying more property, cost of living, etc., before moving.

Open a Health Savings Account

A health savings account (HSA) is a health insurance policy with retirement benefits added. Money contributed to the account is tax-deductible, and withdrawals made for medical applications are tax-free. Unused money is turned over into the following year, and the account builds interest. After you turn 65, you can withdraw the money for any purpose without penalties.
Before you can open an HSA, you must have an approved high-deductible health insurance plan. Fidelity says that the minimum deductible amount for 2023 is $1,500 for singles and $3,000 for a family. The maximum out-of-pocket expenses for singles are $7,500 and $15,000 for families. Although you will pay more in deductibles, your insurance premiums will be lower because you are responsible for a larger portion of the bill. Deductible amounts for 2024 are $1,600 for singles and $3,200 for families.

You can benefit from an HSA if you have maxed out your contributions to other retirement accounts. Contribution limits to an HSA in 2023 are $3,850 (including any employer contributions) for an individual or $7,750 to cover your family. In 2024, the contribution limits are $4,150 for individuals and $8,300 for families. People over 55 can contribute an extra $1,000. For 2023, you can make contributions to an HSA until tax time—April 15, 2024.

An HSA is better for healthy people with higher incomes, which enables more savings to go to retirement. Withdrawals in retirement can provide another source of tax-free income.

Life Insurance Policies

Although it will not generate nearly as much interest as other retirement accounts, you can use a life insurance policy to generate non-taxable income in retirement. You can buy as big a whole-life policy as you want, let it build interest for years, and then withdraw some of the money or cash it out (cancel it) when needed.

If you should die before withdrawing any or all of it, your beneficiaries can use the money for their needs or as an inheritance. Withdrawals or cash-outs from life insurance policies are tax-free.

You can find these and other tax-free income methods for your retirement by talking to an estate planner or tax advisor. The sooner you make any necessary changes and put your retirement money in the right places, the more money you can save.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
Mike Valles has been a freelance writer for many years and focuses on personal finance articles. He writes articles and blog posts for companies and lenders of all sizes and seeks to provide quality information that is up-to-date and easy to understand.