13 Easy Ways To Increase Your Tax-Free Income in Retirement

When people think about retirement planning, they worry about setting aside enough money and hope they won’t outlive their funds. 

Fewer people think about the impact that taxes will have on their money, yet planning a tax-efficient strategy is crucial to keeping as much money as possible in your pocketbook.

Here are 13 simple ways to increase your tax-free income in retirement.

Start saving early. Compound interest sets you up for better long-term growth. It takes around nine years for investments to double, and the longer your investments can marinate, the better.

Spread your funds across various accounts, such as traditional IRAs, Roth IRAs, and employer-sponsored plans. This can reduce your tax burden, diversify risk, and offer more flexibility when withdrawing funds in retirement.

Maximize your contributions to employer-sponsored plans — especially if there is a company match. This added “free money” can significantly boost your retirement savings.

Invest in Roth IRAs, as these accounts are funded with after-tax dollars, and contributions grow tax-free. Then, when you withdraw funds during retirement, you’ll pay no taxes as they were already paid upfront with your after-tax dollars. 

This can be highly advantageous to managing your taxable income during your non-working years.

Converting a traditional IRA (funded with pre-tax dollars) to a Roth IRA is another option for securing tax-free income during retirement. However, you must pay taxes upfront when you make the conversion. Talk to a financial planner to see if this strategy suits you.

Be strategic with how you withdraw your retirement funds. Work with an advisor to plan the sequence of withdrawals — from across different accounts — in the most tax-advantaged way possible. 

For example, many retirees tap into their Roth IRAs before their traditional IRAs to reduce their immediate tax burden.

Funds from your health savings account (HSA) offer a triple tax benefit. Contributions are tax-deductible, growth is tax-free, and qualified medical withdrawals are tax-free. 

Additionally, after age 65, you can withdraw funds from your HSA without a tax penalty. You will, however, have to pay income taxes on HSA distributions unless the funds go to qualifying medical expenses.

For qualifying homeowners, a reverse mortgage can provide tax-free income without selling their homes. However, these loans come with fees and interest that could ultimately impact their estates.

These policies can accumulate significant cash value over the years with the funds growing tax-free. At any age, you can take out a tax-free loan from the policy, and any remaining funds will provide after-death benefits to your beneficiaries.

Municipal bonds are another popular, tax-free investment option. By lending money to local governments, you earn interest, and this income is generally exempt from federal taxes. In some instances, this income is also exempt from state and local income taxes.

Tax laws are constantly changing. Staying informed can help you make the adjustments you need to optimize your financial retirement strategies and minimize your tax burden. Check in regularly with your financial advisor to keep up-to-date.

Consider retiring to a more tax-friendly state. Some states, such as Florida and Tennessee, don’t tax retirement income.

Laddered bonds and tax-deferred annuities can provide added tax-advantaged security during retirement.

With laddered bonds, you can defer taxes on capital gains until you sell the bonds. By staggering their maturity dates, you avoid having everything mature all at once and can spread out the income over multiple years in a more manageable way.

Tax-deferred annuities let your investment grow tax-free until you withdraw, allowing for compounded growth and flexible income timing. You can take distributions during lower-income years that won’t bump you into a higher tax bracket.

Retirement is about enjoying the rewards of decades of hard work, and having a stream of tax-free income makes it easier.

Some upfront planning now can maximize your retirement savings and keep more money in your pocket later, allowing you to live out some of your bucket-list dreams, such as traveling, going on a cruise, or learning a foreign language.