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One of the often overlooked aspects of retirement planning is the tax implications. Without proper planning, taxes can take a significant amount out of your nest egg.
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For example, a $1 million portfolio of 401(k) plans or traditional IRAs may be worth less than $800,000 after tax. Similarly, if the investment is in a regular taxable brokerage account, the income the money generates may also be taxable.
One way to get around this problem is to save and invest even more while working as an adult so you have extra money to pay your taxes. Another is to be tax smart in choosing investments and accounts to minimize your tax liability. Here are some types of non-taxable retirement income:
ross drawer
The easiest way to avoid retirement taxes is with a Roth account. Both IRA and 401(k) plans can be structured as Roth accounts. It does not provide tax deductions for contributions, but allows tax-free withdrawals after age 59 ½.
Essentially, with a Roth account, you pay taxes upfront when you contribute, rather than being obligated to pay for your distributions. If your income is above a certain level ($144,000 for him if you’re single, $214,000 if you’re a co-filer), you can’t donate to Ross, but you can change your traditional plan to Ross at any time. However, just like if you withdraw money, you will have to pay income tax on the converted amount.
For this reason, it usually makes more sense to start Roth early in your career rather than paying a huge tax bill at your peak income.
Inheritance
It’s usually not a good idea to rely on inheritance as a retirement plan. First of all, receiving an inheritance is never a certainty, and what’s more, the amount bequeathed rarely provides sufficient funds for a long-term retirement.
However, many Americans receive an inheritance at some point in their lives, and it is often a good way to supplement existing retirement savings. am. Even if very rare inheritance taxes are included, the beneficiary is not responsible for paying them.
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Municipal bond income
Municipal bonds are issued by states, cities, and various local governments to generally fund projects for schools, roads, and other public good. Municipal bonds are tax deductible at the federal level, so investors do not have to pay federal taxes on interest earned from municipal bonds.
When you buy bonds issued in your state, they are usually exempt from state taxes as well. This makes municipal bonds especially valuable in high tax states like California. In addition to being tax-free, it is also a generally safe investment, making it a good source of retirement income.
HSA withdrawal
A Health Savings Account (HSA) combines some of the best features of both traditional and Roth IRAs into one package. Contributions to HSA are tax deductible and earnings in your account are tax exempt.
Withdrawals are also tax-free when used for eligible medical expenses, which is a fairly broad category. Failure to do so will result in a hefty 20% penalty on withdrawals. However, the kicker in terms of retirement planning is that once she reaches 65, she can withdraw her HSA money for any reason without paying a penalty.
Use for non-healthcare purposes is subject to normal income tax, but avoids penalties. However, the best use of HSA is always for medical expenses, as the funds can be withdrawn tax-free at any time.
Social security payments*
Social Security payments are often tax-free, but this is not always the case. If you’re simply living off Social Security retirement benefits, it’s true that they’re tax-free. However, if you earn over a certain amount, some or most of your payments will be taxable. Here’s how your Social Security taxation for 2022 breaks down based on your income and filing status:
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Individuals with total income between $25,000 and $34,000 may have to pay taxes on up to 50% of their benefits. Anyone whose income exceeds her $34,000 could be taxed up to 85% of Social Security income.
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For joint filers, up to 50% of Social Security income is taxed on income between $32,000 and $44,000, and those who earn more are taxed up to 85% of their benefits.
The Social Security Administration defines “gross income” as one-half of adjusted gross income plus tax-exempt interest and social security benefits.
life insurance money
Much like an inheritance, waiting for life insurance payments isn’t the ideal strategy for funding your retirement plans. However, it is quite possible that some kind of life insurance payment will be made at some point in senior life.
Since these distributions are often in the hundreds of thousands of dollars range, they can have a significant impact on your retirement savings. recipient is tax exempt.
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This article originally appeared on GOBankingRates.com: 6 Types of Non-Taxable Retirement Income
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