After leaving the workforce, you may think you’re not only escaping the nine to five business day but also (most) tax payments. Believe it or not, that may only be partially true. It is entirely dependent on your investments, assets, and where you live.

To protect your wealth and enjoy as much tax-free income as possible, you must consider the following tax-free retirement options and strategies.

Invest in a Roth IRA 

When the market is plummeting, advisors will often tell you to focus on Roth IRA investments. Assuming, of course, you are years from retirement and can withstand the volatility.

Here’s why.

A Roth IRA is one of the most tax-efficient ways to invest. This is because you pay taxes upfront instead of when you withdraw money — allowing your hard-earned money to be accessed tax-free in retirement. There’s no required minimum distribution either, which means you don’t have to begin withdrawing money at age 70 ½. You can let your money sit until you need it, and you can continue your contributions as long as you’d like. There isn’t an age cap.

There also isn’t an age minimum. Working people of all ages can contribute to a Roth IRA.

Roth IRA income limits

While this all sounds great, there are — of course — some limits you need to understand. For example, Roth IRA investments require you have taxable income and your modified adjusted gross income (MAGI) is:

  • less than $196,000 if you are married filing jointly.
  • less than $124,000 if you are single, head of household, or married filing separately (if you did not live with your spouse at any time during the previous year).
  • less than $10,000 if you’re married filing separately and you lived with your spouse at any time during the last year.

Unsure of your MAGI? IRS Publication 590-A provides a worksheet that may be able to help.

Contribution limits to your Roth IRA

As you may have guessed, there is also a cap on how much money you can invest annually in your Roth IRA. The maximum contribution (as of 2020) for someone under 50 years old is $6,000. That amount is raised to $7,000 for those who are over 50. 

If you are married and filing jointly, those amounts can double to $12,000 or $14,000, assuming you’ve met the above MAGI requirements.

Open a 529 education fund

Parents and grandparents should be considering a 529 education fund as part of their investment strategy. This is a tax-advantaged investment vehicle that can protect your retirement wealth while helping a child or grandchild save for college.

Here’s how it works:

529 plans can be used to pay for college costs at any qualified college nationwide. You’ll choose from one of two options: a college savings plan or a prepaid tuition plan.

  • The 529 college savings plan offers several investment options, similar to what you’d see with a Roth IRA. You will invest after-tax contributions, which will go up or down in value based on the investment options’ performance.
  • The prepaid tuition plan lets you prepay all (or some) of an in-state public college education costs.Though you may also convert funds for use at private and out-of-state colleges.

Your investment receives tax-free earnings and tax-free withdrawals as long as the funds are used to pay for qualified education expenses (tuition, fees, books, equipment, etc.).

Best of all, you can invest in almost any state 529 plan, not just the state you reside in, which is fantastic news for out-of-state grandparents. 

Options if the beneficiary does not use the 529 funds

What if the 529 benefiting child does not want to attend college? We get this question a lot. So it’s essential to know your investment is not lost. There are other options you can explore — without penalty — and they include:

  • Change the beneficiary to another family member
  • Make yourself the beneficiary and accelerate your career
  • Use the funds for apprenticeships
  • Pay off student loan debt
  • Put the funds toward private K-12 education

Delay withdrawals from Social Security

Let’s talk about Social Security. Is it always taxable? How can you use it to your benefit so you can enjoy a tax-free retirement? 

Long answer short: social Security benefits may or may not be taxed after 62, depending in large part on other income earned. Meaning the less you make, the less you pay.

According to the IRS, a quick way to see if you will pay taxes on your Social Social Security income is to consider your combined income. To calculate your combined income, follow this equation: adjusted gross income + nontaxable interest + half of your Social Security benefits.

If your combined income is over the IRS base amount, you should expect to pay some tax. As of 2020, the IRS base amounts include:

  • $25,000 if you are a single filer, head of household, or qualifying widow or widower with a dependent child. 
  • $32,000 if you are filing jointly 
  • If you are married but filing separately, you will likely have to pay taxes on your Social Security income.

As you can see, those figures are relatively low, meaning it’s unlikely that Social Security will be a tax-free retirement option. But with the right planning, there are ways to capitalize on your investments. Talk to one of our advisors about some common strategies like:

  • Contributing more to your Roth IRA. Roth IRA withdrawals don’t count toward your combined income. So, the more of your retirement income that comes from your Roth IRA, the more you can reduce your combined income. Following this strategy may eliminate federal taxes on Social Security benefits.
  • Delaying Social Security withdrawals. Not touching your Social Security at age 62 may help avoid paying Social Security taxes. Plus, it offers the added benefit of collecting a more considerable sum of money since you’re continuing to let the funds grow.

Move to a tax-free state

What you pay in taxes during your retirement will depend on how retirement friendly your state is. Because you’re not just facing federal taxes, you also (likely) have state and property taxes.

If you have time to plan and interest in moving, consider this data from Kiplinger, courtesy of the Business Insider.

These nine states tend to carry the most affordable tax burdens based on low income, property, sales, and estate taxes. These states include (starting with Wyoming as number one):

  • Wyoming
  • Nevada
  • Delaware
  • Alabama
  • South Carolina
  • Tennessee
  • Mississippi
  • Florida
  • Georgia

Reaching financial independence

Keeping your hard-earned money is essential for you and it’s important to us. Always remember it’s best to have your savings in a combination of accounts so you can manage your tax bracket in the future.

With the right investment team on your side, you can accomplish all of your financial dreams without any compromises. Call us today and schedule a consultation.