Best Tax Free Retirement Strategies, No Matter Your Age

If you are like many, you are thinking of making consistent investments over time, so you won’t retire like you never worked. And while this investment mindset is quite widespread, you’ll want to look beyond the interest earned and the total wealth accumulated.

The first thought might be how you’ll spend your retirement somewhere on the beach, reminiscing about your past.. 

But before you get to enjoy all that, there’s one thing you’ll do – pay taxes. Sometimes, these taxes are so much that they will rob a part of your legendary dreams. That’s when you’ll realize the importance of financial and tax planning. It will hit you hard that tax professionals exist for a reason and you shouldn’t ignore financial education. 

So, before your retirement days draw nearer, you want to have a qualified strategy that will see you channel money in the right investments. The lesser the taxes you’ll pay on these investments, the better. And that’s why learning more about tax-free retirement strategies is something your future self will thank you for.

SAVING AND INVESTING FOR A TAX-FREE RETIREMENT 

Depending on your goals and the amount you are willing to put aside towards retirement, there are a couple of ways you can accumulate tax-free wealth for your retirement. Most people often feel so overwhelmed by how they should invest their money, that they end up not doing anything at all. 

This is a classic example of having too many choices, that you can’t choose. The truth is, not all those options are worth it. So you should sort out the best investment options and leave the rest behind. You can start by looking into our other articles on the definition of a tax-free retirement account and how to get one, as well as the best tax-free retirement account types. Below, we’ve identified some tax-free retirement strategies based on three age brackets.

AGE BRACKET (18-40)

If you are within this age bracket, you not only have a lot of time to save and invest for retirement but also to increase your current income. Here are the best strategies you can employ:

CONTRIBUTE TO A ROTH IRA ACCOUNT 

Roth IRAs are the ideal retirement vehicles since they grow tax-free income throughout your lifetime. You can also pass the amount down to your heirs and it will continue to grow tax-free. The Roth IRA contribution limit for this age bracket is $ 6,000 per year.  Those making $140,000 or more annually (filing separately) are unable to contribute. It’s worth noting that you can contribute to this account either through your employer or on your own through a self-directed Roth IRA account.

OPEN A ROTH 401(K)

These accounts are more generous, and you can contribute up to $ 19,500 in 2021 with no income cap. If the Roth IRA income cap affects you, you can do a backdoor Roth IRA, i.e., converting your traditional IRA contribution to a Roth. 

INVEST IN MUNICIPAL BONDS

These are bonds issued by states, counties, and cities. The interest you’ll earn isn’t subject to federal tax. If the bond is issued in your state, it may also be tax-free at the state level. 

AGE BRACKET (41-65)

If you are within this age bracket, you can still invest for your retirement with a Roth IRA and Roth 401(K). Additionally, you can consider other options once your family has grown and the kids have moved out. 

One option to consider is the Health Savings Account (HSA).  This allows you to contribute $ 3,600 individually or $ 7,200 for family coverage. Once you are 55 or older, you can put in an extra $1,000. These contributions are tax-deductible, and interest in the account grows tax-free.  Plus, withdrawals for qualified medical expenses are tax-free. Once you turn 65, withdrawals for any medical expense become tax-free.

AGE 65 AND OVER

Above this age, you have probably invested enough, and now is the time to get your investments back. Here, you need to know how much you receive from Social Security and your other income since your benefits may be subject to tax. Even then, it’s possible to owe little to nothing to the IRS. 

Another thing to be aware of is how your withdrawals at this age could affect your taxes. A rule of thumb is to work with a certified financial planner to help you devise a strategy that will see you incur the least tax burden possible. Some of the retirement withdrawal strategies include:

• Using the 4% rule – This will see the retirement money last for a sustained 30-year retirement period.
• Limiting withdrawals to income – take out interest and dividends each year but leave the account’s principal intact.
• Minimizing mandatory distributions – e.g., converting traditional retirement funds to Roth accounts to cut taxes when making withdrawals.  

FINAL THOUGHTS 

All the tax-free retirement strategies highlighted above are worth paying attention to. There’s no one right strategy for everyone since each person’s financial needs are different.  You need to work with a certified financial planner to customize these strategies to match your personal situations.