Planning For a Tax-Free Retirement?

Everyone looks forward to a time when we can retire from the working world and do things that interest us. Whether that retirement dream includes a sandy beach or a snowy enclave, a retirement nest egg that includes some tax-free money probably sounds like to dream too good to be true. However, there are ways save today that can deliver tax-free withdrawals upon retirement.

Most people today have some kind of retirement savings plan.  Chances are, that 401(k) plan from work, or individual retirement plan you started a few years back are funded with pre-tax dollars. That is, the money that came out of your pay check went straight into your retirement savings untaxed.  These are referred to as qualified plans, as they qualify for tax deferral until retirement.  (HINT: They also are protected from creditors under ERISA rules.) Unfortunately, when you begin to withdraw these funds, you will be taxed.  The assumption is that your earnings will be less in retirement, thus your withdrawals will be taxed at a lower rate.  However, that is never a guarantee.  And who wants to pay tax if you don’t have to?

One alternative is to establish a ROTH IRA, which requires you to pay the tax upfront when the money is transferred into the saving plan. Unlike a traditional IRA, withdrawals from a ROTH IRA are tax free.

Now, if you are looking for a specific income upon retirement to supplement your social security check (and pension, if you are one of those fortunate ones,) you may also want to look at an annuity. An annuity is an insurance product that can provide steady monthly income upon retirement, as well as other benefits. Annuities are considered financial products like stocks and bonds, and can be purchased inside your IRA or 401(k) plan. That means, if you established a ROTH IRA, an annuity purchased inside your ROTH will yield tax-free income to you when you retire.

Now, that doesn’t mean the annuity was tax-free, it simply means you paid the tax on the product when you purchased the policy, just as you would with any stock or mutual fund purchase made within your ROTH IRA.

Many Flavors, Many Options

Annuities come in a vast variety of options, including variable, fixed, and variable models. Each is designed to achieve different objectives of the investor, so you definitely want to talk to a licensed professional about your needs and goals.

Cash Value Insurance Policies

Another way to find tax-free money is by investing in a cash value life insurance policy. These policies allow you to withdraw or borrow the cash value portion of the policy. The trick to avoiding a tax obligation is to not withdraw more than the amount of money you have paid into the cash value portion of the policy. Cash value policies include whole life and universal life products. Unlike term life insurance, whole life and universal life policies provide both a death benefit as well as a cash value that grows over time.  Depending on the policy, cash value insurance can provide your designated heirs with money that is not included in your estate (which might help pay for things like funeral expenses, estate taxes on real estate and other needs) and at the same time, provide cash to you either as a plan or as an emergency fund. And, if you ever decide you no longer want the insurance, there is usually a surrender value that will return a portion of your premiums paid.

If alternative investment ideas for your retirement plan sounds like a conversation you would like to have, please feel free to contact our offices for a no-obligation conversation.

PS: The above is for informational purposes only and not personal advice. Before taking any action on your retirement planning, we suggest you contact a professional for specific guidance. We welcome your feedback on topics that will be most beneficial to you.