If you’re looking toward retirement, tax-free income streams are crucial for financial and mental well-being. Financial advisors and other professionals are uniquely positioned to guide retiring professionals toward strategic investments to ensure financial security and peace of mind as they transition out of the workforce.
Below, members of Forbes Finance Council discuss how to build diverse, tax-free income you can access in your retirement. By exploring options like health savings accounts, bonds and retirement accounts, you can set yourself up for success with tax-free retirement income.
1. Create Health Savings Accounts
Our client base has had great success with health savings accounts. For the HSAs, we treat this account as another tax-deferred and tax-free account earmarked for retirement. We plan for current cash flow and other cash positions to pay for out-of-pocket medical expenses while they are working. Our goal is to max out these plans each year and avoid using the assets until retirement. – Louis Cannataro, Cannataro Family Capital Partners
2. Leverage Your Life Insurance
A great strategy for tax-free income is the use of IRS code 7702. You can borrow a zero net loan from a life insurance policy on an annual basis. This brings down your tax bracket. A key to this strategy is properly setting up the policy. Work with an expert in life insurance before executing anything to ensure you are maximizing the policy. – Joshua Sherrard, Strategic Navigators Inc.
3. Convert Your Roth IRA
Roth IRAs and HSAs are great vehicles for tax-free income later. HSAs may also be self-directed into alternative assets. We have many clients who choose to do this with HSAs and do not tap into these accounts for current medical expenses so they can build more wealth for retirement. It may also be a good time to talk to your tax advisor about Roth conversions. – Jaime Raskulinecz, Next Generation Trust Company
4. Move To A State With Low Taxes
Contributions to health savings accounts, Roth IRAs, Roth 401(k)s and investing in municipal bonds can provide tax-free income. Careful budgeting and strategically using cash or other liquid assets, along with retirement income, can reduce your combined income to prevent or limit taxation of Social Security benefits. Live in a non-tax state or one with beneficial retirement income exclusions. – Robbin Caruso, Prager Metis CPAs, LLC
5. Optimize Your Roth Conversion Timing
Potentially the best strategy for not only tax-free income in retirement but also tax minimization post RMDs is for retirees to convert some IRA assets to Roth IRA after retirement but before RMDs, using current versus projected tax assumptions as the guide. – Rory O’Hara, Ausperity Private Wealth
6. Combine Life Insurance With Roth Contributions
Tax-free income streams in retirement are accomplished through the funding of whole or universal life insurance policies, coupled with maximizing contributions to Roth 401(k)s and Roth IRAs. This approach is very expensive and requires time in order to be effective. However, if executed properly, it will provide for a tax-free income strategy in retirement. – Jeremy Jacques, Jacques Financial, LLC
7. Combine An HSA With A Roth IRA
In the U.S., Roth IRAs provide the benefit of tax-free returns on investments, while HSAs (health savings accounts) offer triple tax advantages for medical expenses. Similarly, in the United Kingdom, ISAs (individual savings accounts) allow for tax-free interest, dividends and capital gains. It’s crucial to have a good understanding of the retirement account options available in your country. – Pankaj Vasani, Cube Highways InvIT
8. Manage Risk With Multiple Types Of Investments
Utilize investments that offer tax-free income at distribution, of course! This includes Roth IRAs, municipal bonds and properly structured permanent life insurance. These vehicles used together will not only provide tax-free income but also varying levels of market exposure which, depending on time frames, is important. – Anthony Williams, Mosaic Financial Associates
9. Establish Your Savings Plan ASAP
Start early; whether in the U.K. or the U.S., utilizing tax-free ISA allowances and pension or 401k contributions from a relatively young age maximizes your ability to build up tax-free later-life income. – Sabrina Castiglione, Pento
10. Stick With Roth IRA Over Traditional IRA
Prioritize Roth IRA contributions. Unlike traditional IRAs, contributions are taxed upfront, but qualified withdrawals—both principal and earnings—grow tax-free. This allows you to maximize your retirement income while minimizing your tax burden. – Frankie DiAntonio, Lexington Capital Holdings
11. Explore Government Bond Options
Some of the best sources for tax-free income during retirement are government utility and bond funds and income-producing real estate in opportunity zones that have strong depreciation shelters. Some tax deferral plans like Roth IRAs are also a good vehicle for some. Your CPA is a good source to validate any of these options for an individual’s specific needs and limitations. – Paul Daneshrad, StarPoint Properties
12. Make Decisions Based On Your Tax Bracket
Evaluate your income tax bracket during the tax year and proactively assess what your income tax exposure is projected to be. Then, depending on the investments and income streams available, retirees should have the flexibility to use certain accounts more or less than others for cash flow support, based on what their combined usage does to their tax situation. – Brian Niksa, Capstone Financial Advisors, Inc.
13. Invest In HSAs For Tax-Free Growth
A little-known but effective strategy to create tax-free income in retirement is investing in a health savings account (HSA). An HSA provides triple tax advantages: 1. Contributions are tax-deductible; 2. Growth is tax-free and 3. Withdrawals for qualified medical expenses are also tax-free. Although not all employers offer it, it is slowly becoming part of the mainstream offerings. – Ash Shetty, PineBridge Investments
14. Reduce Your Taxable Income
Another simple strategy is to strategically use tax-loss harvesting. By selling investments at a loss, you can offset capital gains and up to $3,000 of ordinary income per year. This reduces your taxable income, and the proceeds from these sales can be reinvested. This is beneficial during market downturns, allowing for tax savings while maintaining a long-term investment strategy. – Manoj Kumar Vandanapu, UBS
15. Hold Onto Assets For Better Tax Rates
Long-term capital gains can offer significant tax advantages when held for more than a year before being sold. This strategy involves holding onto assets, such as stocks, real estate or other investments, allowing them to appreciate over time. By doing so, you become eligible for the preferential long-term capital gains tax rates, which are typically lower than the ordinary income tax rates. – JD Morris, RHC 21 LLC (a SPE Fund) with family of Special Purpose Entities (SPE or SPV)
Link to full Forbes article HERE
