5 Nontaxable Sources of Income in Retirement


Do you have an income source for your retirement?

You’ve surely worked hard all your life and paid your fair share in taxes every time, and now that you’ve finally reached retirement age, you can finally start enjoying all those benefits your labor brought you.

However, don’t get your hopes up. The federal government is not through with you simply because you are leaving the workforce. Even if most of your retirement income comes from investments or other sources rather than a paycheck, you might still owe taxes on it.

We know that you want to relax and have a good time now that you don’t have to work anymore. But if you want to save some of your hard-earned income and not pay huge taxes, there are a couple of aspects you should be aware of.

Following the criteria laid out by the Internal Revenue Service (IRS), you may be able to avoid paying taxes on the following 5 sources of retirement income. If you want to pay little to no taxes, grab your notebook and a pen and start taking notes!

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1. The Money You Get From Your Roth IRA

When you’re an employee, you know for a fact that you will receive a paycheck each month, but when you enter the retirement stage, things are different. You can receive money by claiming your Social Security benefits, or get your income from your 401(k) plan, or from your pension.

As you can imagine, your golden years represent the period when you need money the most. The good thing is that you might avoid paying taxes on withdrawals from your Roth IRA.

Any contributions to a Roth IRA are subject to federal income tax in the year they are earned. As for a standard IRA, on the other hand, the contributions have to be paid the year they are withdrawn.

It is possible to put money into a Roth IRA without worrying about paying taxes on it or paying penalties for early withdrawal, and it will grow tax-free until you withdraw the money. Qualified distributions are defined by the IRS as:

  • it’s been at least 5 years since you opened your account;
  • age 59 1/2 and above.

When compared to regular IRAs, which impose obligatory withdrawals, the Roth IRA allows you to keep your money invested for as long as you choose, without incurring penalties. This means that you’ll have the opportunity to be more flexible with your money, whether you want to spend it or not.

2. Distributions from Health Savings Accounts (HSAs)

Because of the tax benefits they provide, health savings accounts, also known as simply HSAs, have become more common and important for people who are planning their retirement. According to different certified public accountants, these accounts are the most tax-advantaged retirement savings accounts people can use.

If you follow the rules, you might deduct your contributions, avoid paying tax on any interest or profits from your investments, and also avoid paying any taxes on any withdrawals for medical purposes. Also, if you are eligible, you can use an HSA to pay for Medicare premiums and other medical costs you have in your golden years.

Another great thing about having an HSA is that you also don’t have to worry about making small distributions. In the same way that you can wait to use the funds in your Roth IRA when you need to pay your healthcare costs, you can do the same with your HSA.

For instance, you might use your HSA to be able to pay for a wide range of medical expenses, including prescription drugs, surgery, physical therapy, dental care, insulin, and many more. This will allow you to make the most out of your retirement savings, which is definitely great for those who want to save money.

Photo by Tiko Aramyan from shutterstock.com

3. Profit from the Sale of Your Home

If you plan on selling your home, there are some things not many people know, although they’re really important. For instance, if you’ve lived in your house and made it your principal residence for at least 2 of the 5 years prior to selling it, the IRS says that “you might be able to certify to exclude up to $250,000 of that profit from your income”. Or even up to $500,000 if you file a joint return with your husband or wife.

Given the reforms made to the treatment and taxation of capital gains by the Taxpayer Relief Act of 1997, nowadays retirees might get up to $500,000 in tax-free income. For example, if you purchased your property for $200,000 and then you sold it for $800,000, $500,000 of your $600,000 profit would be immune from taxation.

You should take advantage of capital gains exemptions every time you’re able to do so, given the fact that the IRS taxes almost everything you buy, including homes, automobiles, boats, and investments.

4. Discount on Municipal Bonds

Municipal bonds are government bonds that are considered tax-exempt by the staff at the IRS. That is because they’re essentially loans given to your state or local government to fund infrastructure improvements like new hospitals, bridges, roads, and other such projects.

As the federal government doesn’t tax the interest you earn on these types of loans, the money you gain from the interest on municipal bonds is more likely to be considered tax-free money. This is good, isn’t it?

For this reason, municipal bonds are often recommended by plenty of financial advisors, especially for those who are approaching retirement age. If you’re not convinced why this thing is endorsed for people who enter their golden years, there you have it: you might even double the money you contributed by investing it tax-free and enjoying the resulting compound interest, which is tax-free as well.

5. Reverse Mortgage Repayments

A reverse mortgage is a kind of mortgage that allows homeowners aged 62 and up to convert a portion of their home’s value into cash. In an arrangement like this, the lender makes the payments to the homeowner, while in the case of a regular mortgage, the homeowner pays the bank.

In conformity with the IRS, whether they’re received as a lump amount, a monthly advance, or a line of credit, reverse mortgage payments aren’t taxable.

Payments that come from a reverse mortgage are counted as part of the loan, not as income, so they have no impact on government programs like Social Security or Medicare. There are, of course, different rules that retirees must follow to get the most out of their reverse mortgage. These include:

  • even though a reverse mortgage has been taken out, there are always costs associated with owning a house, such as maintenance, insurance, and property taxes;
  • if the reverse mortgage is not paid off before death, the rest of the loan will be returned from the deceased’s estate;
  • just like other types of loans, a reverse mortgage also piles up fees and interest, which means that over time, the loan balance will go up. Long story short, the amount of money you owe might be more than you first received.

…What type of income do you have as a retiree? If you want to tell us, you can do it by leaving a comment down below! 

…If taxes are one of your biggest concerns, it’s time to become a pro! We have all the info you need, so check out this article: 11 Little-Known LEGAL Ways to Reduce Your Taxes!

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2 Responses

  1. RE: profitable sale of primary residence…….purchd $330K….primary res for 18+ years…..sold January 2021 for $950K….I understand the $500K ‘freebie’ for us as joint filers but that leaves about $120K profit. My question>>>can this $120 K be offset by improvements made to the home (eg. redid master bath, finished basement, etc.). and, lastly, paperwork with dollar amounts would certainly be best, but what if that paperwork is long gone, eg. bathroom redone about 16 yrs ago and we have a fair recollection of amount paid but no paperwork at this late date.

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