News & Trending Tax News

10 Tax-Free Investments Retirees Should Consider

These moves can help lower your tax bill and protect your retirement income.

man using calculator
Updated Sept. 21, 2024
Fact checked

We receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

When you are no longer receiving a paycheck, reducing taxes becomes crucial to protecting retirement income. Retirees have specific financial goals, and minimizing tax obligations is one key to making money last longer.

Set yourself up for a stress-free retirement by considering one or more of these 10 tax-free investment options.

Steal this billionaire wealth-building technique

The ultra-rich have also been investing in art from big names like Picasso and Bansky for centuries. And it's for a good reason: Contemporary art prices have outpaced the S&P 500 by 136% over the last 27 years.

A new company called Masterworks is now allowing everyday investors to get in on this type of previously-exclusive investment. You can buy a small slice of $1-$30 million paintings from iconic artists, all without needing any art expertise.

If you have at least $10k to invest and are ready to explore diversifying beyond stocks and bonds,see what Masterworks has on offer. (Hurry, they often sell out!)


Municipal bonds

Vitalii Vodolazskyi/Adobe newspaper with words municipal bonds

Municipal bonds are one of the best tax-free investment options for retirees. Local governments issue these bonds, which are often exempt from federal income tax. In some cases, they’re exempt from state and local taxes as well.

This makes municipal bonds an excellent choice for retirees looking to generate income without increasing their tax burden. Plus, they are relatively low-risk, providing a steady stream of income.

Want to learn how to build wealth like the 1%? Sign up for Worthy to get ideas and advice delivered to your inbox.


Roth IRAs

Andrii/Adobe Conceptual handwritten text showing ROTH IRA

A Roth IRA is a powerful tool for growing investments tax-free. Unlike traditional IRAs, withdrawals from a Roth IRA are tax-free as long as the account has been open for at least five years and you are at least 59½ years old.

It’s worth noting that you cannot contribute to a Roth IRA unless you have earned income. So, you will need to do some work — even a part-time job — to use this option.

If you haven’t yet retired, consider contributing to a Roth IRA so you can tap the money tax-free once you finally stop working.

Roth 401(k) accounts

Lane Erickson/Adobe money jar for savings

Similar to Roth IRAs, Roth 401(k) accounts allow you to withdraw funds tax-free in retirement. These accounts combine the benefits of tax-free growth and withdrawals with the higher contribution limits of a traditional 401(k).

As with a Roth IRA, you will not be able to make new contributions to a Roth 401(k) unless you are still working and earning income.

Get a free stock valued between $5 to $200

Secret: You don't need thousands of dollars to buy thousand-dollar stocks or create a diverse portfolio.

Robinhood offers a method of investing called “fractional shares.” On its own, one share of a single stock could cost a lot of money, making it difficult to diversify. Robinhood allows you to buy pieces of stock instead, so you have the option to build a diverse portfolio quickly.

Let’s say you want to invest $250, as an example.

With that amount, you could build a relatively diverse portfolio with an investment of $50 in a big tech stock, $50 in a retail stock, $50 in an energy stock, $50 in a manufacturing stock, and $50 in a bank.1

Even better news? Add a Robinhood Gold membership, and you’ll get access to 5.00% APY2on your uninvested cash3and the ability to buy and sell stocks 24 hours a day, 5 days a week.

Open and fund a Robinhood account and earn up to $200 in stock


Tax-exempt mutual funds

Vitalii Vodolazskyi/Adobe documents about mutual funds

Investing in tax-exempt mutual funds is another way to reduce taxes during retirement. These funds typically invest in municipal bonds or other government securities that are exempt from federal taxes.

They provide retirees with a way to diversify their portfolio while keeping their tax liability to a minimum.

Health savings accounts

utah51/Adobe Document of Medical savings account.

Health savings accounts (HSAs) offer a triple tax advantage for retirees with high-deductible health insurance plans (HDHP).

Contributions are tax-deductible. In addition, earnings grow tax-free, and you will not owe taxes on withdrawals you use to pay for qualified medical expenses.

As health care costs rise in retirement, an HSA can help cover those expenses without adding to your tax bill. If you have already been contributing to an HSA during your working years, it can be a valuable tax-free resource in retirement too.

Just note that once you enroll in Medicare — typically at age 65 — you are prohibited from making new contributions to your account.

Series I bonds

jetcityimage/Adobe us savings bonds

The earnings on Series I bonds generally are taxable. However, there is one major exception: Funds from these bonds that are used for some educational expenses escape taxation.

Even if you don’t use the bonds to fund an education, the interest earned on these bonds is exempt from state and local taxes. You also have the option of deferring federal taxes until you redeem the bond.


Tax-exempt ETFs

maurice norbert/Adobe invest in portfolio diversity etf

Tax-exempt exchange-traded funds (ETFs) are similar to tax-exempt mutual funds. These ETFs focus on tax-exempt investments, such as municipal bonds, providing retirees with an easy way to invest in tax-free income sources.

529 plans (for grandkids going to college)

Andrey Popov/Adobe 529 College Savings Plan Form

While 529 plans are typically used for educational expenses, they can still play a role in a retiree's tax strategy. If you're planning to help your grandchildren with their college expenses, contributing to a 529 plan can allow your contributions to grow tax-free.

Additionally, withdrawals for qualified educational expenses are tax-free. Contributing to a 529 can be a tax-advantaged way to provide more financial help to your grandchildren.

Indexed universal life insurance

thodonal/Adobe life insurance

Indexed universal life (IUL) insurance policies offer retirees a special tax advantage. While the premiums are not tax-deductible, the cash value of the policy grows tax-free.

Additionally, the death benefit is also tax-free to your beneficiaries. This type of policy can make sense for retirees looking for a tax-efficient way to leave a legacy for their heirs while also having access to tax-free cash during their lifetime.

Earn up to a $300 bonus and grow your money with up to 4.20% APY

This powerful combination checking + savings account from SoFi® allows you to earn up to a $300 bonus with direct deposit and grow your money with up to 4.20% APY.4

This is one of the top accounts we’ve seen, and offers like this can be rare. You work hard, and now it’s time to make your money work for you — with SoFi, you can grow your money with hardly any effort!

SoFi has no account or overdraft fees5 and additional FDIC insurance up to $2 million on deposits is available through a seamless network of participating banks.67 Plus, you can receive your paycheck up to 2 days early.8

How to earn up to $300: Sign up and make a direct deposit within the first 25 calendar days of the promotional period, then collect a $300 cash bonus with a direct deposit of $5,000 or more.

SoFi is a Member, FDIC. 7

Open your SoFi account and set up direct deposit


Other types of life insurance

Rawpixel.com/Adobe indian family interested in life insurance

While you won’t benefit directly from tax-free income with a traditional life insurance policy, your heirs will.

The death benefit from a life insurance policy is typically tax-free, allowing you to provide for loved ones without worrying about taxes reducing their inheritance. This can be a crucial part of your estate-planning strategy, ensuring your wealth is passed on efficiently.

Bottom line

BillionPhotos.com/Adobe hand putting coin in piggy bank

Finding tax-free investment options can be helpful to preserving your savings during retirement.The tax-free options on this list help retirees supplement their retirement income and minimize their tax burden.

Consider adding some of these investments to your retirement plan to set yourself up for a more secure and financially sound future.


Easy Tax Relief Benefits

  • Eliminate your tax debt
  • Potentially reduce the amount you owe
  • Stop wage garnishments and bank levies
  • Communicates with the IRS on your behalf