A recent report by the National Institute of Health found that nearly one-half of your lifetime health care costs are incurred when you are a senior. And with healthcare costs on the rise, having a well-established retirement plan is more important than ever.
But seeing high taxes taken out of your paycheck every time you try to put money into your savings account can be frustrating. You may have started to consider tax-free retirement options like deferments and 401(k)s to try to save more of your money.
But, are you doing everything you can to pinch those pennies so you can provide for yourself and take that trip to China you’ve always dreamed of?
Here we take a look at the top five tax-free retirement options out there so that you can make a plan that keeps more dollars in your pocket. Read on to learn more.
For a Tax-Free Retirement – Reduce Your Exposure
Putting together a retirement strategy without paying attention to your tax exposure would be a huge mistake. When you retire, taxes will become a real burden on your income and with our federal deficit growing every day, it’s likely that taxes will only go higher in the future.
But, if you put together the right combination of tax-free retirement options, then you can provide a secure retirement fund for yourself. When combined with financial management tools, you can’t lose.
1. 401(k)
In the golden era, businesses used to give gold watches and pensions to their employees when they retired. But today, we settle for employer-sponsored retirement options like the 401(k).
While you don’t need to have an employer that offers a contribution in order to set up an account for yourself, many businesses offer to match their employee’s contributions as an additional benefit of employment.
If your employer doesn’t offer to match your contribution, you should still try to put away as much as possible to this kind of account since they will save you a lot of money in taxes in the long run.
But if your employer does offer to match your investment, then you should always contribute as much as possible. Otherwise, you’re leaving money that could have been in your pocket on the table. The money will come straight out of your paycheck, so you won’t even feel it go missing.
The maximum amount of money you can put away in one year is $18,500. But, if you are over the age of fifty and playing catch up, you may be able to contribute up to an additional $6,000 a year.
2. Roth IRA
The Roth IRA, unfortunately, forces you to pay taxes on your contributions up front, but the benefit is that the money in the account will grow tax-free and can be removed without the government getting a dime.
That is, of course, if you have held the account for at least five years and are older than the age of 59 and a half. Another limitation on a Roth IRA account is that you can only contribute if your income is under $120,000 for single people and $189,000 for married couples. That means that if you make a high income, you may not qualify to contribute to this kind of plan.
You should also know that you can only contribute $5,500 a year to your Roth IRA account. But, if you are over the age of fifty, you may be eligible to contribute $1,00 more to help you catch up if you recently began contributing. To learn more about the Roth IRA, read more here.
2. Defer Your Property Taxes
Before you get too excited about this idea, you should know that it isn’t available in all areas. You will need to check with your local laws to find out if deferring your property taxes is an option for you.
If you are trying to free up money while you are already retired, you should consider deferring your property taxes until after you die or sell your house. Then, once you’re gone, your family can sell the home and pay the back taxes on the property with interest.
This is an option for people who really need additional income now. With the longer life expectancy of people in the twenty-first century and the ever-rising health care costs, many retirees are finding they don’t have enough money to pay their bills.
In fact, a recent report showed that the average household of working people age 55-63 has only $135,000 in savings. That comes out to be about six hundred dollars a month to live off of.
Reverse Mortgages vs. Tax Deferments
Many people who consider tax deferments are also considering a reverse mortgage. It’s important to know how these two options vary.
A reverse mortgage means that the bank you have been paying your mortgage to slowly start to buy it back from you. The money you take out of the equity of your home doesn’t have to be paid back until after you move or die.
But if you want a reverse mortgage, you will have to jump through several hoops and pay some upfront costs.
A tax deferment allows you to postpone fewer payments leaving less for your children to have to pay back after you die.
Eligibility
Twenty-four states in America offer tax deferments, but some of them are limited by the town. The interest rates on the deferments vary greatly as do the eligibility requirements.
But, on average, you need to be between 62-67 years old to start your deferment. In addition, you may have had to be a resident in your home for a period of time ranging from one to ten years. Finally, your participation may also be limited by your income and property value.
3. Invest in Municipal Bonds
Municipal bonds allow government entities to borrow from citizens to balance their budgets. The bonds are paid back with a low return.
But, although the return is low, this is still a great option since it is generally low risk and you can purchase them with absolutely no taxation at the state or federal level. Make sure you weigh the benefit of not paying taxes against the higher rate of return of other retirement savings options and do what makes sense for you.
Before you begin purchasing municipal bonds, you should check to see what the tax rates are in your area. In addition, you should look into the Alternative Minimum Tax that may take effect and could end up costing you a great deal of money.
4. Open a Health Savings Account
We’ve mentioned already multiple times that healthcare costs are on the rise and not planning to slow down any time soon. People are living longer than ever and the older they get, the more their health care will cost.
But, you can mitigate some of this risk by opening a health savings account. These tax-deferred and tax-free earnings allow you to purchase eligible medical expenses.
Health savings accounts are generally limited to people who have high-deductible insurance plans, so make sure you look into your insurance situation individually.
If you’re really lucky, you may find a job that offers to match your health savings account deposits. To use this money, you don’t have to wait until you are of retirement age. So, you should take care to invest as much in this account as possible for a rainy day.
5. Get a High-Quality Life Insurance Plan
Most people don’t think of life insurance when they think about their retirement plan, but that’s a mistake. It can be used similarly to a Roth IRA and is a common choice for higher income people.
This is because you have no limit on the amount of money you can pay into it and the interest that is earned on the account will grow tax-free. In addition, if you handle everything properly, you should be able to get your money out of your life insurance plan without paying taxes on the back end.
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Now that you know what it takes to achieve a tax-free retirement plan, you know what pieces you need to put into place to make it happen.
Depending on whether your employer offers any retirement benefits or not, you could benefit from making a variety of moves like opening a 401(k), Roth IRA, or a health savings account.
To save even more, consider deferring your property taxes, investing in municipal bonds, and contributing to a high-quality life insurance plan.
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