Retiring with tax-free savings is the goal of many people. While it may seem difficult to arrange your finances so that you are withdrawing tax-free dollars at retirement, there are several valid strategies to do so. William Bitters, President of United Financial Information Services, outlines the steps that one should consider to support their golden years with possible tax-free retirement dollars.
Before any other savings tip, it is vital to make sure that you start saving as early as possible. It is never too late to start, but for the maximum benefit at retirement, you should start saving as soon as you have your first job. Compounding interest and returns over time will make your money grow as much as possible and allow you to live comfortably during your retirement years.
1. Use a Roth IRA
One of the easiest ways to start with earning tax-free retirement income is to open a Roth IRA. While the money counts as taxable income in the year it is added to the IRA; it is tax-free upon withdrawal. People under 50 are allowed to contribute $5,500 per year. Over 50, the amount jumps to $6,500. One disadvantage to a Roth IRA is that couples who make more than $189,000 per year are not eligible to contribute. Single people can earn only $135,000.
In an ideal situation, people who started contributing the maximum amount of $5,500 to a Roth IRA at the age of 22 and continued until they reached the age of 65, earning 5% each year, would retire with 1.625 million dollars.
2. Find a Roth 401(k) or 403(b) Plan
If your employer offers this plan, you should take advantage of it. A Roth 401(k) has similar provisions to a traditional 401(k), including employer contributions, but the money is not taxable at withdrawal. You can contribute up to $18,500 per year under this plan, and there are no income restrictions. Similar to all 401(k) income, you will pay taxes on the money in the year in which you contribute.
3. Health Savings Account
Most people who have a Health Savings Account or HSA through their employer use this money in the year it was deposited. However, unlike with Flexible Spending Accounts or FSAs, there are no rules which say that you have to use the money by the end of the calendar year. You can hang onto this money until retirement and use it for your expenses at that time. Money going in is taxed, but withdrawals are tax-free. It is a novel strategy, and not many retirees have taken advantage of it. It can be a great way to boost your healthcare dollars going into retirement.
4. Whole Life Insurance
Many people believe that they can stop paying for life insurance once their families have been established, and once their children are living on their own. However, several different types of life insurance can provide income while the holder is alive. It can be a great way to boost your tax-free retirement income. It is an excellent choice for people who have maxed out their contributions to other forms of tax-exempt retirement accounts (401K, 403B, SEPP) especially if they are in a higher tax bracket.
It’s known that when one receives Social Security Disability benefits for 24 consecutive months, on the 25th month, Medicare kicks in with both Part A and Part B at no cost.
Often a life insurance policy has been previously purchased or will be purchased in the future. In this case, a whole-life policy will prove to be superior to a universal life policy when applied to one receiving social security disability benefits. It is because when a whole life policy is purchased, one can add “disability waver’. Should the insured become disabled, the insurer will pay the premium necessary to keep the policy in force one month at a time. In other words; physical money is going to be paid into the policy by the insurer. It protects all of the other benefits guaranteed in a whole life policy and will increase the cash value which can be used as collateral for a policy loan should the necessity occur. Should the insured recover from the disability premiums resume? Nothing need be paid back because nothing has been borrowed. The premium payment continuation was a benefit purchased when the policy was taken out.
It is not possible with most universal life policies because the company merely waives the cost of insurance, which reduces the policy to cash value earnings only. Simply put; no money is being paid into the policy
Many people believe that they can stop paying for life insurance once their families have been established, and once their children are living on their own. However, several different types of life insurance can provide income while the holder is alive. It can be a great way to boost your retirement income because it has no income limits. It is an excellent choice for people who have maxed out their contributions to other forms of retirement accounts or if they are in a higher tax bracket.
You can think of whole life insurance as a Roth IRA with no contribution limits. These plans also do not incur penalties from the IRS for withdrawing money before you are 59 ½. It makes the insurance route the right choice for people who are planning to retire early.
Look into Strategies for Tax-Free Retirement
William Bitters of United Financial Information Services encourages all individuals to look into the benefits of tax-free retirement. Invest as early as possible for the best returns.