When you retire, your income will no longer come through your job but through three possible sources—Social Security, individual retirement accounts (IRAs), and funds from savings and investments. And, like your income, while working, your retirement income will be taxed. There are many ways, however, for you to avoid these fees. Here are three tips for earning a tax-free retirement.
Set Up a Tax-Free Account
Most retired individuals earn their income from multiple sources. Some of these sources must be taxed, such as Social Security benefits. There are, however, two types of accounts that are not taxed—Roth IRAs and Health Savings Accounts.
Roth IRAs are untaxed savings accounts and are among the best and easiest ways to earn a tax-free retirement. If you put $5,500 per year from the time you were 22 until you reached the age of 65, with compound interest, you would have more than 3.25 million dollars. And, if you are 50 years old or older, you may contribute up to $6,500 per year, making this a fantastic option for retirees to earn a tax-free income.
Health savings accounts (HSAs) are another great option for a tax-free retirement. Contributions to these accounts are tax-deductible, and there are no income limits, meaning that you can contribute to it and receive a tax break and tax-free income during retirement.
Live in an Income Tax-Friendly State
One of the most surprising ways to have a tax-free retirement is to simply consider where you are living. Of the 50 states, seven do not charge income tax—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, with Tennessee joining in 2021. Other states may not be fully income tax-free, but they may have tax exemptions for retirement plans and Social Security benefits.
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Investments, including bonds and stocks, are a great way to have a tax-free retirement. Municipal bonds and funds may be bought and sold without being taxed. And, without an income limit, it is a viable income source for retirees.
Dividend stocks, i.e., regular dividends from publicly-traded U.S. corporations, are taxed at much lower rates than other stocks and investments, anywhere from 0-20% depending on your income. Both of these investments, then, are a great option to work towards your dream tax-free retirement.
Earning a Tax-Free Retirement is Easy with the Right Help
Understanding your financial troubles and needs is our top priority—with our expertise, we will ensure that your money troubles are solved. For help planning your tax-free retirement, call World Financial Solutions at 281-639-7787.