Americans who are in the workforce pay taxes. Although the amount that is paid during prime work years is burdensome, it can be multiplied for senior citizens who live on limited resources. The last thing that retired people need is to pay taxes on the fixed amount that must tide them over in their golden years. The good news is that there are several types of retirement income sources that are good options. Here are 10 sources of retirement income that are not taxable.
1. Municipal Bonds
Municipal bonds are a good choice for seniors over stocks because the investment represents less of a risk. Municipal bonds are issued by cities, states, and other localities. You must be careful to purchase bonds that are issued by your home state however, or you may end up paying state and local taxes. Municipal bonds without exception are exempt from federal taxes.
2. Social Security benefits
When seniors reach the age of retirement, some will be entitled to tax-free benefits, but some will have to pay taxes. If your only income source is Social Security, then you won't have to pay federal taxes on the benefits. Even some recipients do have another income source that may be able to avoid paying taxes. If you're a single filer and your income is under $25,000 annually, or if you file jointly with less than $34,000 per year, you can avoid paying federal taxes, with the only exceptions to the rule being West Virginia, Vermont, North Dakota, and Minnesota. These states do not offer the exemption.
3. HSA Withdrawals
A Health Savings Account, also known as an HSA is a fund that you might be eligible for if your health insurance plan has a high deductible. The way an HSA works is that you can use what you need for medical expenses from the account, and carry over the unused portion from year to year. The funds can be invested for additional growth of the account. All the contributions that you make to an HSA are tax-free. The gains on your HSA investments are also tax-free. When you take out withdrawals from an HSA during retirement to pay deductibles and co-pays for medical expenses, these amounts are tax-free also.
4. Life Insurance cash-outs
Permanent life insurance policies may be used as a tax-free source of income during retirement. Term life policies do not qualify. Permanent life insurance policies build cash value over time. Cashing out partial or total funds from your policy when you're officially retired is allowed at a tax-free rate for the entire amount that you paid into the policy.
5. Roth IRA or 401(k) withdrawals
Investing retirement savings in a Roth IRA and 401(k) plan doesn't qualify you for a ta break at the time that you fund them, but they do offer an excellent source of tax-free funds during your retirement. Roth IRAs and 401(k) plan work just the opposite of traditional IRAs. You can fund a Roth regardless of your annual income as long as your employer offers this provision and option in their plan.
6. Life insurance dividends
When premium payments are made on a life insurance policy they are usually made with after-tax dollars. What this means is that dividends are viewed as an overpayment on your premium. In most cases, these dividends are tax-free. The only time tht the dividends you receive are taxable is if the amount that you receive comes out to more than the premiums that were paid, but only the excess amount from that figure is taxable.
7. Veteran's disability payments
While this is not a traditional retirement income, it is a tax-free source of income. Veterans of the armed services of the United States of America are entitled to tax-free benefits. This could also be considered a source of income for retirement if the veteran is completely retired from the workforce.
8. Sale of home profits
You might also be eligible to exclude up to $500,000 of profit from taxable income on a joint return if you recently sold a home. There are a few rules that go with this exemption, however. You must have owned and lived in the home for a minimum of two of the five years prior to the date of the sale. If this set of circumstances applies to you but you are single, then the exclusion limit is reduced to $250,000.
9. Reversed mortgage income
If you take out a reverse mortgage on your home then you won't have to pay taxes on the proceeds. This is one of the hidden advantages of a reverse mortgage. Whether you're receiving monthly payments or you take the entire amount in a lump sum, this source of funding is not taxable.
10. Some immediate annuity incomes
While most annuity payments are taxable there is one kind that is not. An immediate annuity that is purchased with after-tax money, may be eligible for at a minimum a tax reduction. There are two parts to the payments that you receive from an immediate annuity. One part is interest and the other part is a return of principal. Only the interest part of the payment is taxable unless the annuity was purchased with pre-tax money. If that is the case then the entire amount of income would be taxable.
These are the ten income sources that are either tax-free or at least receive a tax-break of some type during retirement. It is wise to plan ahead for your golden years. This means making wise investments that will pay out the most during retirement while avoiding the need to pay federal income taxes. It takes a bit of research to make sure that you're aware of the tax rules for any investment that you make as the rules are subject to change from year to year.
Written by Bill Vix
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