While nobody likes paying taxes, they can be a particular burden for retirees. If you’re looking for a way to generate some tax-free income in retirement, here are three ways to get started.
1. Open a Roth IRA
Roth IRAs offer a number of benefits, but the one that many savers find most appealing is the ability to collect tax-free income in retirement. Though Roth IRA contributions aren’t tax-deductible (meaning, you won’t get a tax break up front), once the time comes to take withdrawals, you won’t owe the IRS a dime. Furthermore, while money placed in a traditional retirement savings account gets to grow on a tax-deferred basis, your Roth dollars get to grow completely tax-free. And, because Roth IRAs don’t impose required minimum distributions, you’ll get the option to leave that money in your account indefinitely, where it can continue to generate tax-free earnings.
While Roth IRAs do come with annual income limits (single filers earning $132,000 or more and joint filers earning $194,000 or more can’t contribute directly), if you’re a higher earner, you can get around these restrictions by funding a traditional IRA and then converting it to a Roth. Similarly, if you have a 401(k) plan through your employer, that, too, is eligible for a Roth conversion. Though you will need to pay taxes on the contributions you move over to a Roth once you shift those assets, doing so will buy you far more financial flexibility in retirement.
2. Invest in municipal bonds
Municipal bonds differ from corporate bonds in that the interest income they pay is always exempt at the federal level, and if you buy bonds issued by the state in which you reside, you’ll avoid state and local taxes as well. If you’re looking for a way to generate a steady stream of tax-free…