Taxes are often one of a retiree’s biggest expenses. I’ve never met anyone who saved for a year for the ability to pay more taxes on their retirement income. Building a retirement income you won’t outlive is hard enough without adding the burden of overpaying your taxes. Any strategy that helps you increase your tax-free retirement income will help minimize these two challenges.
As a certified financial planner who loves helping my clients pay fewer taxes, I get excited about helping people stay on track to reach financial freedom. Financial security can help you live a happier, healthier and wealthier life in retirement. The larger your retirement tax burden, the more income-producing assets (such as cash, investments, real estate, 401(k) and Cash Balance Pension Plans) you will need to accumulate to maintain your standard of living as you age. It will also likely increase the investment risks you must take with the assets accumulated over your lifetime.
Even if you had already been utilizing a few tax planning strategies, it may be beneficial to update your tax plan based on changes in the OBBBA, the last Trump tax plan.
Here Are 7 Efficient Strategies To Increase Your Tax-Free Income
Contribute To Your Roth IRA
You can think of the Roth IRA as the starter retirement account. You can contribute up to $7,000 in 2025 ($8,000 if you are age 50 or older). Your contributions won’t get you any tax deductions, but your Roth IRA will grow tax-free. Most importantly, the money comes out as tax-free retirement income.
While $7,000-8,000 may seem like a small amount to save each year, the problem is that most of you will need to save substantially more than that amount to reach financial freedom and other financial goals. Also, there are income limitations on who can contribute and how much they can contribute.
If you contributed $7,000 per year from age 22 until age 65, earning a 10% return each year, you would have more than $4.14 million. If you worked a little longer and saved until age 70, that number would jump to more than $6.72 million. That’s the magic of compounding interest at its finest. Think of how much tax-free retirement income you could draw from a $6.72 million Roth IRA.
Set Up Your Roth 401(k) Now
If you want even more tax-free income than a Roth IRA can deliver, consider contributing to a Roth 401(k) or Roth 403(b). Your employer will need to offer this option. Self-employed people can set up their own Roth Solo 401(k).
A Roth 403(b) or Roth 401(k) has tax benefits similar to a Roth IRA; your growth and withdrawals are tax-free. The difference is that you can contribute up to $23,500 per year, plus a $7,500 catch-up contribution if you are 50 or older, for 2025. You will pay taxes on the contributions, but these plans don’t have income restrictions.
Utilize Mega Backdoor Roth Contributions
If you are a supersaver and have already maxed out your Roth IRA or Roth 401(k), you may want to check out the mega backdoor Roth. With this strategy to get more tax-free income, you may be able to make additional after-tax contributions to your 401(k). This tax-planning strategy could help you contribute up to $70,000 per year to your 401(k).
For more on the Mega Backdoor Roth Strategy check out his post:
Tax-Free Income From Municipal Bonds And Funds
Bond interest rates have been more appealing in the past few years. Tax-free income from municipal bonds may make them more competitive with corporate bonds.
A brief overview of tax-free income from municipal bonds is that distributions from these bonds (or bond funds) are not subject to federal income taxes but may still be subject to state income taxes. For this reason, the interest rates these bonds pay are generally lower than those of taxable bonds. These bonds also have various investment and reinvestment risks, especially in a rising-rate environment.
Optimize Your Health Savings Account For Tax-Free Income
A health savings account can be a valuable triple whammy for tax-free income. Investing in an HSA can be even more tax-efficient than a Roth IRA. First, you can get a tax deduction for contributions to your HSA each year. Second, investments in an HSA grow tax-free. Third, when taken correctly, withdrawals from an HSA are also tax-free. You will need the appropriate type of high-deductible health insurance plan to be eligible to contribute to this type of account, and some plans may limit investment options.
HSAs are meant to pay for current medical expenses, but you don’t have to use the account for those costs now. You could hold the HSA until retirement, with the fund growing and compounding. You could then reimburse yourself for all the medical expenses you paid over the years (keep your receipts). Expenses can include Medicare premiums. The drawback is that in 2025, you can only contribute $4,300 per year. Couples can contribute $8,500, and those 55 and older can make an additional $1,000 catch-up contribution. These amounts are adjusted each year.
Tax-Free Income From Cash Value Life Insurance
The strategy for maximizing tax-free income from life insurance has been pitched as the Rich People Roth. Most people don’t think of life insurance as part of their retirement plan; some believe it isn’t needed for those who have already retired. However, for some, cash value life insurance can be an excellent tool to bridge the gap to financial freedom if you are married, have kids, have maxed out contributions to your other retirement account(s) or are in a high tax bracket.
I won’t list all life insurance benefits, but some policies offer benefits you can enjoy before you die. More importantly, perhaps, is the potential for tax-free income in retirement. You should consider this strategy only after you have maxed out your other retirement accounts, especially if you don’t need large amounts of life insurance.
The Rich Person Roth is often oversold or misrepresented. So, ensure you work with a fiduciary financial planner before buying a life insurance policy for the tax benefits, especially if you are not already maximizing your contributions to various other retirement accounts available to you. Those options likely have lower fees and should be more beneficial for building your wealth.
Only Realize Income In The Zero Percent Tax Brackets
If your income is low enough, your income taxes due can still be zero. For example, in 2025, the standard deduction for a married couple is $31,500. So, if you earned less than this after the standard deduction, your tax rate would be zero. I don’t think most of you reading this would want to live on this amount for your entire retirement, but there may be a few years when you strategically have a lower income as part of your retirement income tax strategy.
Be proactive and develop a retirement income plan to achieve your financial goals and ensure a secure retirement. Diversification of the taxation of your various sources of retirement income gives you the flexibility to pay the least amount of taxes over your lifetime.
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