3 Incredible tips to generate tax-free income in retirement

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3 Incredible tips to generate tax-free income in retirement

NO one likes paying taxes - the ones earning in billions hate it the most. For retirees, taxes quite seem like nightmare. Since you’re looking for ways to generate some tax-free income during retirement, here are three ways to get started.

1) Open a Roth IRA

While Roth IRA has a number of 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.

Moreover, money poured in Roth IRA accounts grow completely, unlike other traditional tax-deferred retirement savings accounts. And since Roth IRAs do not impose required minimum distributions, you can leave the money there indefinitely, and completely 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 simply 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 convert it into Roth as well. 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.

2) Invest in municipal bonds

Municipal bonds are different from Corporate bonds. In municipal bonds, the income from 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 for state and local taxes as well.

Municipal bonds are a great choice 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 compared to corporate bonds. Even if municipal bonds default, you’re likely to recover faster than the corporate counterparts.

3) Rent out your house for 14 days or less

The IRS wants its share of every income you receive, and rental income is not an exception. However, there is a deviation. In case you rent out your home, or a portion of your home for 14 days or less in a year, the entire income you earn will be tax-free.

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 avoid taxes as long as you stay within the limit.

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 let your house for shorter tenures, you can keep away your hard earned money from the IRS and use it after retirement.
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