Tax free retirement income

Everyone hates tax deductions, and the ones earning billions hate it the most. For retirees, falling under a higher tax bracket and facing tax deductions seem like a nightmare. A retiree always wants his/her money to grow tax-free.

They always want to save their income from federal income taxes, state income taxes, or even from estate tax.

As a retiree, since you’re looking for ways to generate some tax-free retirement income, here are several ways to get started.

1. Tax-Free Retirement Accounts (TFRA)

Opening a tax-free retirement account is one of the best ways to save money on income taxes. For retirees, paying taxes on income is a burden, as most people have limited income in retirement. It will be too painful for them to bear the huge pressure of the tax bill and carry on regular expenses. So, a TFRA can be a solution to increase retirement income.

With a Tax-Free Retirement Accounts (TFRA), you don't have to pay tax on growth or principal. But your TFRA account should be structured as per most recent IRS tax regulations, and the account should be appropriately set up.

By opening a tax-free retirement account, you'll be joining the uncapped growth of the stock market and may increase tax-free income. An investment-grade financial organization will secure the money if the market goes down.

Popular tax-deferred accounts are traditional IRAs and 401(k). Notable tax-exempt retirement accounts are Roth IRA and Roth 401(k).

Using a Roth account is the most straightforward approach to saving taxes on your retirement money. Roth accounts, which don't provide a tax benefit for contributions but permit tax-free withdrawals after age 59 ½, can be set up for both Roth IRA and 401(k) plans.

While Roth IRA has several benefits, the one that many savers find enticing is the provision to collect tax-free income in retirement. Though Roth IRAs provide no tax break for contributions, during earnings and withdrawals, you won’t owe the IRS a dime during earnings and withdrawals.

Moreover, money poured into Roth IRA accounts grows completely, unlike traditional tax-deferred retirement savings accounts. And since a Roth IRA does not impose required minimum distributions, you can leave the money there wholly and indefinitely forget it until your retirement hours.

While there are annual income limits in Roth IRAs, if you earn more, there is a way you could get around these restrictions. You would need to fund a traditional IRA and then convert it to a Roth.

Likewise, if you got a 401(k) plan through your employer, you can also convert it into Roth. Though you’d need to pay taxes on the contributions you move into a Roth, such a step would provide you ample flexibility in retirement.

When you contribute to a Roth account, you pay your taxes upfront rather than when you receive dividends. If your income is higher than a specific amount ($144,000 for single filers and $214,000 for joint filers), you cannot contribute to a Roth, but you can change your regular plan to a Roth at any time.

However, just like if you had taken the money out, you will be required to pay income taxes on the conversion amount. Due to this, starting a Roth account early in your career is usually preferable to paying a hefty tax burden during your years of highest earnings.

2. Municipal bonds

States and cities issue these bonds, and various localities fund projects like schools, roads, and other items for the common good. For retirement planning purposes, municipal bonds are different from Corporate bonds. In these bonds, the income from the interest you get is always exempt at the federal level.

Further, if you purchase bonds issued by the state government where you live, you won’t need to pay state and local taxes. Due to this, municipal bonds are beneficial in jurisdictions with a high tax bracket, such as California. They can also be a reliable source to generate retirement income because they are often risk-free investments that are also tax-free.

Municipal bonds are granted tax relief at the federal level, meaning investors don’t have to pay federal taxes on the interest earned from any municipal bond. Municipal bonds are a great choice to avoid tax liability if you’re looking for a steady flow of tax-free income post-retirement. While bonds are a reasonably safe investment, they are also 50-100 times less likely to default on their obligations than corporate bonds. Even if municipal bonds default, you’re likely to recover faster than your corporate counterparts.

3. Stimulus payments

According to the IRS, none of the three coronavirus stimulus payments permitted in 2020 and 2021 are taxable income. In a technical sense, they are payments in advance of tax credits. The taxation of Social Security benefits is also unaffected by stimulus funds.

So, it is one of the primary tax-free income sources that can help in your tax planning and boost your retirement savings, other than your ordinary income.

4. Rent from the house

The IRS wants its share of every income you receive; rental income is no exception. However, there is a deviation. If you rent out your home or a portion of your home for 14 days or less in a year, your entire income will be tax-free. So, keep this point in mind during retirement planning

In order to qualify for this, you’ll need to limit the rental period to 14 days or less in a calendar month. Also, you need to use the home yourself for more than 14 days, or more than 10% of the total number of days you rent it out.

The good thing is you don’t need to rent out for 14 consecutive days. Hence, you can rent out for meetings, parties, get-togethers, and other daily purposes and can easily stop paying taxes as long as you stay within the limit.

5. Money from home sales

Capital gains taxes are a tax on income from the sale of assets like stocks, housing, businesses, and other types of investments held in non-tax-favored accounts. Capital gains may not be liable to federal income tax, depending on how much money you gained through selling your primary home.

You may be able to exclude up to $500,000 of that gain from your income if you file a joint return with your spouse or up to $250,000 if you file alone, according to the IRS.

According to tax laws, the property had to have been your primary residence for at least two years and five years before the sale of the property for you to qualify for this tax relief. It is better to consult a tax professional or a certified financial planner early on.

6. Reverse mortgage payments

Reverse mortgage payments are not taxable, according to the IRS. You won't pay federal income taxes on the money, whether you receive it as a lump sum, a monthly advance, a line of credit, or all three. But, this source of tax-free retirement income is only suitable for some.

7. Social Security Payments

Social Security benefits are frequently tax-free, but only sometimes. Social Security retirement payments are tax-free if you just use them to support yourself.

However, some or perhaps all of your payments become taxable if you earn more than a particular sum. Based on income and filing status, the taxation of Social Security for 2022 is as follows:

  • If a person's combined income is between $25,000 and $34,000, it may be taxed up to 50%, and if it is over $34,000, it may be taxed up to 85%.
  • Up to 50% of Social Security income for joint filers with incomes between $32,000 and $44,000 is taxable, and up to 85% of benefits are taxable for those with higher incomes.
  • "Combined income," according to the Social Security Administration, is calculated as adjusted gross income + nontaxable interest plus 50% of Social Security benefits.

Make sure to discuss this matter with a certified financial planner or a tax advisor.

8. Money withdrawals from Health Savings Account

Some of the most advantageous features of both standard and Roth IRAs are combined into one package by a health savings account (HSA).

Tax deductions are available for contributions to HSAs, and account growth is tax-free. Withdrawals are also tax-free when used for qualifying healthcare costs. Otherwise, your withdrawals will be subject to a severe 20% penalty.

The real kicker in terms of retirement income, though, is that once you turn 65, you're free to take any amount from your health savings account without incurring a charge.

You can escape the penalty if utilized for non-healthcare purposes, but you will still be subject to regular income tax. However, since you can take your money at any moment tax-free, the optimal use of an HSA will always be for medical costs.

According to Adam Berry, Founder, AdamBerrySeo - “Another significant benefit of your HSA account in retirement is that there is no minimum necessary distribution (RMD). Until you need to access your HSA savings to pay for medical expenses, you can keep them hidden from year to year”.

9. Funds from Inheritances

Many people in America get an inheritance at some time in their lives, and it's frequently a terrific way to top off existing retirement funds through other income.

The finest aspect of an inheritance financially is that income generated is tax-free. Beneficiaries are not liable for paying estate taxes, even if they apply, which is uncommon.

10. Life Insurance proceeds

There are better courses than waiting for a life insurance payout to support a retirement plan, just like waiting for an inheritance. However, you may receive a life insurance payout at some point in your senior years.

These distributions can significantly impact your retirement funds because they are frequently in the hundreds of thousands of dollars range.

Additionally, life insurance payments are tax-free retirement income to the receiver, at least when paid out in a lump sum rather than in installments, exactly like inheritances are.

Yongming Song, the CEO of Live Poll for Slides, said, “Taking up life insurance or annuities can assure peace as you will not have to worry about the government gnawing away your retirement benefits. Insurance premiums can be expensive, and getting your money back within a short review period might be difficult. Still, in the end, it always pays out substantial amounts that are sustainable”.

11. Benefits for veterans

Numerous benefits received through the Department of Veterans Affairs (VA) of the United States are regarded as tax-free income.

These tax-free retirement advantages, described in IRS Publication 525, helped veterans avoid ordinary income tax and increase retirement income. The benefits are as follows:

  • Veterans and their families are given disability compensation and pension income for disabilities.
  • Dividends and earnings from veterans' insurance given to veterans or their heirs.
  • Interest on insurance dividends deposited in a tax-exempt account with the VA.

12. Gifts are exempt from tax deduction

According to the IRS, the most property you get as a gift, bequest, or inheritance isn't counted as part of your income. However, income from gifts of property, such as interest, dividends, or rent, does.

Additionally, it would be taxable if someone attempted to avoid paying taxes by gifting you only the property's income or by putting the asset in a trust.

13. Public assistance benefits

IRS Publication 554 states that many forms of public aid are often exempt from taxable income.

  • Medicare benefits.
  • Welfare benefits.
  • Mortgage assistance.
  • Crime victim payments.
  • State reemployment assistance.
  • Food benefits (by the Nutrition Program for the Elderly).


The less money you lose to taxes, the more you’ll have at your disposal during your retirement days. If you can invest in municipal bonds, save in Roth IRA, or other investment strategies, you can keep away your hard-earned money from the IRS and use it as tax-free retirement savings for boosting your investment portfolio. Don't forget to consult a financial advisor on financial planning and to maintain taxable accounts.

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