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