How to get $100,000 or $200,000 in annual tax-free retirement income

Surely no one – regardless of age – likes to hand over any of their earnings to the IRS.

In retirement, however, doing so can feel even more painful. Assuming you’ve completely left work income, any money Uncle Sam owes comes from your retirement income and savings – both of which are expected to fund your golden years in two or even three decades.

The good news is that there are strategies to reduce what you pay in federal taxes — and, perhaps, state taxes — that, of course, translate to more money on your side. But getting there can involve some work.

More from Personal Finance:
What We Learned From Biden’s Tax Return, Harris 2020
Banks offer credit cards to people who don’t have a credit score
Students protest against compulsory Covid vaccination at colleges

“To generate tax-free income on a regular basis over a long period of time, you have to be up,” says certified financial planner Avani Ramnani, director of financial planning and wealth management at Francis Financial. plan a lot. New York.

On perspective: If you want your retirement savings to generate $100,000 a year in tax-free retirement income, and you want to stick to the 4% annual withdrawal rule – in general, the rate will make the money Your portfolio lasts at least 30 years – you need a portfolio of at least $2.5 million.

Of course, your annual cash flow needs could be higher or lower than $100,000. And, you may need to use a combination of strategies, depending on your particular situation.

If you can save money in the Roth version of your individual retirement account or 401(k) plan, you can set yourself up for a pretty simple way to get tax-free income.

While your contributions are not tax deductible, as they may be with a traditional IRA or 401(k), distributions made after age 59½ are generally tax-free.

“The best way to get tax-free income is to pay taxes first – and the best way to do that is to contribute to [a Roth account] throughout your working years,” said CFP George Gagliardi, founder of Coromandel Wealth Management in Lexington, Massachusetts.

The maximum amount you can contribute in a year to a Roth IRA is $6,000 ($7,000 if you’re 50 or older). However, that amount begins to decline at an income of $125,000 for a single taxpayer and $198,000 for married couples filing jointly and disappears at $140,000 (for a single taxpayer). relatives) and $208,000 (couples).

More Generous Roth 401(k) Accounts: There’s no income limit, and you can contribute up to $19,500 in 2021 (plus another $6,500 if you’re 50 or older).

There are many ways to reach the Roth IRA income limit. For example, you can contribute to a Traditional IRA and then roll the money over to a Roth. There may be taxes to be paid for the conversion, but you will not have to pay taxes on any future distribution.

If you have access to a health savings account – which can only be combined with a high-deductible health plan – it can be used as a way to plan for some income. tax free in retirement.

Unlike the similarly named health flexible spending account, you don’t have to spend your HSA money within a certain time frame.

HSA contributions are tax-deductible, interest on the account is tax-free, and withdrawals used to pay for qualified medical expenses are also tax-free and penalty-free. (At age 65, withdrawals can yield anything without penalty, although if the money is used for non-medical expenses, it will be taxable).

You can contribute $3,600 to an HSA in 2021 ($7,200 for family coverage). If you’re 55 or older, you can drop an extra $1,000.

These bonds are issued by states, counties, cities, and the like to fund public projects. And, the interest you earn on so-called munis is generally not subject to federal taxes. If the bond is issued in your state of residence, it may also be tax exempt at the state level.

However, “if you buy munis for a state you don’t live in, you’ll have to pay state income tax on those things,” says Ramnani at Francis Financial.

So, for example, if you live in New York and you buy bonds issued in California, you still have to pay state income tax on them, Ramnani said.

There may also be certain circumstances in which munis are subject to federal taxes, so it’s important to know before assuming your income is tax-exempt.

Any income from an investment held for more than one year is considered long-term and is generally taxed as such. (Otherwise, it is taxed as ordinary income.) The same goes for qualified dividends.

For long-term profits, the tax rate depends on your income. If you’re a single filer earning up to $40,000 ($80,000 for couples filing jointly), the rate is 0%. If you can keep your earnings below those thresholds, those earnings can be tax-free income.

However, keep in mind that taxes are only one factor to consider when it comes to any investment strategy in retirement.

“You have to think about portfolio allocation,” says Ramnani. “Are you allocated in a way that is diversified and aligned with your risk tolerance and goals?

“There may be competing goals or considerations.”

Although permanent life insurance policies often come with much higher premiums than term life insurance, part of the reason is the savings aspect of these policies.

“The idea is that you pay those high premiums and some goes into the insurance section and the rest goes into the savings and investment pool,” says Ramnani.

Depending on the specifics, these so-called cash value life insurance policies can be purchased, says CFP Michael Resnick, senior wealth management advisor at GCG Financial in Deerfield, Illinois. used to generate tax-free retirement income.

“But there are some additional complications when it comes to distribution, so be careful,” he said.

Similarly, annuities can provide a stream of income in retirement. In general, if you use after-tax money to finance an interest, only the interest payable is sufficient. However, there are different types of annuities, and they can be more expensive than other income stream options. And, once you hand over your money to the insurance company that sold you the annuity, it can be difficult to get it back after a short review period.

Depending on the contract, you may be able to pay a so-called return fee if you no longer want to receive the annuity or withdraw more than you allow. That fee can be quite high, especially in the early years of the contract.

Depending on how much you receive from Social Security and your other earnings, your benefits may be taxable – but you still may not owe Uncle Sam.

The calculation essentially involves adding half of your benefits to your adjusted gross income, as well as the non-taxable interest (i.e. muni bonds). If that amount is $25,000 to $34,000 for a single filer ($32,000 to $44,000 for married couples filing jointly), then 50% will be taxable. Below that income range, it is not taxed; if it is higher than those amounts, 85% is taxable.

However, even if the calculation results in a taxable amount, you still get the standard deduction ($12,550 for singles and $25,100 for couples, in 2021). . And, if you’re 65 or older, you get a larger standard deduction — an extra $1,700 for single applicants and $1,350 each for married couples.

In other words, your deductions or deductions could bring your actual tax burden down to zero or close to what it would have been if you had taxable income.

Of course, there are other sources of income that can come to you in retirement and are not taxable.

For example, if you are divorced, alimony (spousal support) is not taxed on the recipient if the divorce occurred after 2018. Also, if you received a gift from your parents , the amount will not be taxed to you.

The same goes for life insurance proceeds if you are the beneficiary of the policy. And, any gains from the sale of your primary home usually come with one exclusion: Up to $250,000 exempt if you’re a single filer, and $500,000 for married couples filing general profile.