Best Ways to Generate Tax-Free Income in Retirement: Think About This Stuff Now

Nobody wants to pay taxes on hard-earned income in retirement, including you. Here's what you can do to sidestep paying taxes in retirement.
By Entrepreneur
Entrepreneur
Entrepreneur
Empowering People in the Business of Changing the World | Entrepreneur® is dedicated to fueling the world’s visionary leaders compelled to make a difference through their innovative ideas, businesses, and points of view.
July 29, 2021 Updated: July 29, 2021
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This story originally appeared on MarketBeat

Nothing feels more deflating than having to pay taxes on every penny you’ve ever saved and invested.

If you have the wherewithal to think about how you’d like to receive your retirement income in advance, good for you. It’ll benefit you down the road, big time!

Let’s take a look at a few foolproof ways to not pay taxes (er… at least on the back end) when you’re retired. The catch: You have to start thinking critically about many of these options years—years!—before you retire.

Tip 1: Take Advantage of a Roth IRA

Saving money in a Roth IRA means tax-free income once you take it out in retirement. Why is the money tax-free when you take it out in retirement? The reason: Roth IRAs are funded with after-tax dollars and you won’t have to pay taxes on distributions made after age 59 and a half.

However, your contributions aren’t tax-deductible like they are with a traditional IRA or 401(k).

You can contribute $6,000 in 2021, though you can contribute more if you’re 50 or older—$7,000. However, if you make over $208,000 per year as a couple or $140,000 as a single individual, you cannot contribute to a Roth IRA.

Tip 2: Use a Roth 401(k)

A Roth 401(k) is a tax-advantaged retirement savings vehicle that combines features from traditional 401(k) plans and Roth IRAs.

You make pre-tax dollars with a traditional 401(k) and get a tax break up front, lowering your income tax bill. Your money grows tax-deferred until you withdraw it. However, withdrawals get taxed as ordinary income when you retire, and you’ll also pay state taxes as well. You must withdraw at age 59 and a half because you’ll pay a 10 percent penalty if you withdraw if you’re under age 59 and a half.

Entrepreneur
Entrepreneur
Empowering People in the Business of Changing the World | Entrepreneur® is dedicated to fueling the world’s visionary leaders compelled to make a difference through their innovative ideas, businesses, and points of view.