The Importance of Tax-free Income During Retirement

Unlike most of your retirement accounts such as 403b & 401k plans, pensions, and Social Security benefits, which will all be taxed as ordinary income during retirement, tax-free account distributions will provide greater flexibility related to your overall withdrawal strategy and income tax exposure during these Golden Years. So how do you create this tax-free “bucket” of funds? It is relatively simple with the use of specific types of investment accounts.

The simplest account to use to create a source of tax-free income during retirement is an individual Roth IRA. Depending upon your age, and provided you have earned income for the year, you can fund this account with up to $7,000 (for 2022). The account, and subsequent contributions, will grow tax-free and provide withdrawal flexibility during retirement since the Roth status does not expose the balance to the IRS required minimum distributions associated with your tax-deferred assets. Health Savings Accounts are also another great vehicle for increasing your tax-free “bucket” of funds available to use for your retirement expenses. Even capital gain taxes associated with regular investment account withdrawals can be eliminated if you can hold your overall income under a specific threshold for the tax year. This tactic can be aided by taking specific distributions needed to meet your budget from your other tax-free accounts.

Tax-free income sources are one of the most important aspects of retirement planning, so make sure to educate yourself on how best to utilize and maximize these potential assets.

by Mark S. Reagan – Financial Advisor