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When it comes to retirement planning, it’s important to consider how taxes can bite your nest once you reach your golden years.
Assuming you have left behind earnings at work, any amount owed to the IRS will be deducted from your retirement savings or income. So, the more strategies you can set to minimize or eliminate accounts, the more money you will keep.
Of course, getting there involves doing some work in advance.
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“To make non-taxable earnings on a regular basis over a long period of time, you need to set up a lot of planning,” said certified financial planner Avani Ramnani, general manager at Francis Financial of New York.
From a perspective: If you want your retirement savings to generate $ 50,000 a year in non-taxable retirement income and you want to adhere to a so-called withdrawal rule of 4% per annum – in general, earnings rates last at least 30 years – you should .
Of course, your annual cash flow needs from your nest can be greater or less than $ 50,000. You may need to apply a combination of strategies, depending on the details of your situation.
If you can save money in the Roth version of an individual retirement account or plan 401 (k), you can prepare for a fairly simple way to generate non-taxable income. See the article : Best Expert Money Advice for Boomers – GOBankingRates.
Although your contributions are not tax deductible, as may be the traditional IRA or 401 (k), distributions made after age 59 ½ are generally non-taxable.
“The best way to end up with non-taxable income is to pay taxes first – and the best way to do that is to contribute [a Roth account] during your working years, ”said CFP George Gagliardi, founder of Coromandel Wealth Management in Lexington, Massachusetts.
The maximum you can contribute to a Roth IRA in one year is $ 6,000 ($ 7,000 if you are 50 or older). However, this amount begins to be phased out at an income of $ 125,000 for a single taxpayer and $ 198,000 for married couples filing a joint tax return and disappears at an income of $ 140,000 (for singles) and $ 208,000 (for couples) .
Roth 401 (k) accounts are more generous: there is no income limit, and you can contribute up to $ 19,500 in 2021 (plus an additional $ 6,500 if you’re 50 or older).
There are ways to circumvent the Roth IRA’s income limit. For example, you could contribute to a traditional IRA and then turn the money into Roth. You may be subject to conversion taxes, but you would not pay distribution taxes.
Health savings account
If you have access to a health savings account – which can only be matched with a deductible health plan – it can be used as a way to plan some non-taxable retirement income. To see also : Ken Morris: Prepare now for next year’s likely tax law changes | Vitality: Active Seniors.
Unlike a similarly named health-flexible spending account, you don’t have to spend HSA money on time.
HSA contributions are tax deductible, account winnings grow tax-free, and withdrawals used to pay qualified medical expenses are also tax-free and non-taxable. (At the age of 65, withdrawing money can go to anything without paying a fine, although the money, if used for non-medical expenses, would be subject to taxation).
You can contribute $ 3,600 to HSA in 2021 ($ 7,200 for family coverage). If you are 55 or older, you can invest an additional $ 1,000.
These bonds are issued by states, counties, cities and the like to finance public projects. And the interest you earn on so-called ammunition is generally not subject to federal tax. If the bond is issued in your country of residence, it may also be tax-free at the state level.
However, “if you buy ammunition for a country where you do not live, you will have to pay state income tax,” said Ramnani of Francis Financial. This may interest you : The 7 Must-Have Things the Best Brokers Have in Common.
If you buy ammunition for a state where you do not live, you will have to pay state income tax for them.
General Manager at Francis Financial
So, for example, if you live in New York and buy bonds issued in California, you still have to pay state income tax, Ramnani said.
There may also be certain cases where municipalities are subject to federal taxation, so it’s important to know before you assume your earnings are tax-free.
Capitalize on long-term capital gains rates
Any return on investment held for more than one year is considered long-term and is usually taxed as such. (Otherwise taxed as ordinary income.) The same goes for qualifying dividends.
For long-term gains, the tax rate depends on your income. If you are a single tax payer and have an income of up to $ 40,000 ($ 80,000 for married couples who file together), the rate is 0%. If you can keep your income below those thresholds, those gains can be non-taxable income.
However, keep in mind that taxes are just one of the considerations when it comes to any retirement investment strategy.
“You have to think about portfolio allocation,” Ramnani said. “Are you assigned in a way that is well diversified and in line with your tolerance for risks and goals? They can be competitive goals or considerations.”
Life insurance or annuities
Although permanent life insurance policies generally come with much higher premiums than term life insurance, part of the reason for this is the savings aspect of these policies.
“The idea is to pay those high premiums, and part of that goes to insurance, and the other part goes to the savings and investment bucket,” Ramnani said.
Depending on the specifics, these so-called cash life insurance policies can be used to generate non-taxable retirement income, said CFP Michael Resnick, senior wealth management advisor for GCG Financial of Deerfield, Illinois.
“But there is some additional complexity when it comes to distribution, so you have to be careful,” he said.
Similarly, annuities can provide a stream of retirement income. If you finance the money you use after tax, only interest is taxed, generally speaking. However, there are many different types of annuities and they can be more expensive than other income flow options. And once you hand over the money to the insurance company that sold you the annuity, it will be difficult for you to return it after a short period of review.
Depending on the contract, you could pay what’s called a surrender fee if you no longer want an annuity or if you withdraw more from it than allowed. That fee can be quite steep, especially in the first years of a contract.
Depending on how much you receive from Social Security and other income, your benefits may be taxed – but you can still owe Uncle Sam little or nothing.
The calculation basically involves adding half of your benefits to your adjusted gross income, as well as non-taxable interest (i.e., muni bonds). If that amount is $ 25,000 to $ 34,000 for one taxpayer ($ 32,000 to $ 44,000 for married couples who file applications together), then 50% is taxed. Below that income range is not taxed; if it is above these amounts, 85% is taxed.
However, even if the calculation results in a taxable amount, you will still deduct the standard deduction ($ 12,550 for singles and $ 25,100 for married couples, 2021). And if you’re at least 65, you’ll get a higher standard deduction – an additional $ 1,700 for single files and $ 1,350 per person for married couples.
In other words, your deduction or deductions can reduce your actual tax burden to or near zero if you have taxable income.
There are, of course, additional types of income that could retire to you and that are not taxable.
For example, if you get divorced, alimony (spousal support) not taxable to the recipient if the divorce occurred after 2018. Also, if you receive a gift from, say, a family member, it is not taxed.
The same goes for life insurance income if you are a policyholder. And any profit from the sale of your primary home it mostly comes with an exclusion: The exception is up to $ 250,000 if you are a taxpayer and $ 500,000 for married couples who file applications together.