It's never too late to start planning for the future.
It’s true that when it comes to investing for the future, the best time to start saving is yesterday. Of course, life has a habit of throwing curveballs, even for those who masterfully manage their finances. From economic downturns and inflation to job loss, regulatory changes, and rent and loan interest hikes, there’s no shortage of forces at play to eat away at your savings. But there’s no need to lose hope, no matter how close you are to retirement age.
Whether you’re in your 30s or 70s (or anywhere outside that range), there are plenty of tax-free income strategies to take advantage of when planning for retirement. While our list isn’t exhaustive, here is a quick retirement strategy guide for each decade to explore some options as you build a tax-free retirement plan.
Strategies for Tax-Free Retirement Income in Your 30s
While it’s never too early to start saving for retirement, your 30s are a great time to start planning if you haven’t already. With helpful financial tools such as compounding interest, time is your best ally when it comes to growing your investments. The more time you have, the more your principal can compound, picking up momentum (and value) with each passing year.
Some of the best ways to do this are through either a Roth IRA or Roth 401(k). If you’re self-employed or prefer having more control over your investment strategies, a Roth IRA is one of the best options. Otherwise, if you’re working full-time, see if your employer offers plans with Roth 401(k)s. While you don’t have as much of a say with a 401(k) (your employer chooses the financial institution and portfolio spread), some employers will match your contributions, helping you save even faster. Both Roth instruments are tax-free too; the contributions in either account are with after-tax money so your withdrawals in retirement don’t count as taxable income.
Other tax-efficient options include mutual funds and ETFs, especially those with high dividend yields. While you may be taxed on dividend income and capital gains if you sell these investments, you can take advantage of tax-loss harvesting to lower tax liability while pruning your portfolio of poor-performing stocks.
Strategies for Tax-Free Retirement Income in Your 40s
By the time you’re in your 40s, it’s important to build on the financial foundations you’ve laid so far. As your income grows, be sure to increase your contributions to your tax-free accounts. You can also diversify your investments for optimal tax efficiency. For instance, instead of just using Roth IRA and 401(k)s, you can invest in traditional IRAs and 401(k)s as well.
Where Roth account contributions are taxed and withdrawals (after you’re 59 1/2) are not, traditional IRAs and 401(k)s are reversed: contributions aren’t taxed, but withdrawals are. It’s a useful diversification strategy to have both kinds so that, depending on your cash needs in retirement, you can draw from the accounts that have the least negative impact on your finances then while choosing options that have the least negative impact on your finances now.
Beyond these, consider tax-free municipal bonds that pay out tax-exempt interest regularly until their maturity. Government and municipal bonds are usually tax-free at the federal level, though depending on your state, they may also be exempt from local and state taxes as well, making them useful long-term investment tools.
If you still carry any high-interest debt such as credit cards or student loans, prioritize paying these balances off. With debt like this, it’s rarely the principal but the interest month-over-month that can destroy your financial security. Once that debt is paid off, start rolling over the money you would’ve paid on your credit cards into investments instead — a method called snowballing.
Strategies for Tax-Free Retirement Income in Your 50s
Your 50s are generally the milestone where you’re halfway through your career: you have plenty of experience (and, ideally, the salary to show for it) but thoughts of enjoying time outside of work become more prevalent. At this point, you want to maximize the contributions to your Roth IRA and 401(k) accounts if you haven’t already. If you have an investment portfolio, now’s a great time to adjust for risk tolerance and tax efficiency. Where you might have thrown money freely at the “next big thing” in your 20s and 30s, finding stocks, ETFs, and funds whose gains are conservative but consistent over time might be a better move now. As always, tax-loss harvesting can still increase your portfolio’s effectiveness and tax efficiency.
If you have a family, annuities and life insurance policies are also great investment tools, especially if you want to ensure your loved ones are taken care of if anything were to happen to you. While life insurance policies usually pay out when you pass away, you can enjoy disbursements from annuities while you’re still alive. However, not all annuities are equal, coming in different flavors such as fixed, variable, and indexed. Be sure to research which annuities are the best for your current situation and future goals.
Strategies for Tax-Free Retirement Income in Your 60s
A person’s 60s is when retirement is just over the horizon. You’ve spent all this time saving up. Now it’s time to think about cashing out. By developing a tax-efficient withdrawal strategy, you can make the most of the nest egg you’ve spent all the time building. One such way is knowing when to pull from your Roth accounts vs. your traditional retirement savings. If, for whatever reason, you’ve found that having only Roth accounts makes sense for your post-retirement strategy, you can convert traditional IRAs and 401(k)s into their Roth variants. A word of warning though: converting these accounts could incur a large tax bill so be sure to discuss this with a financial planner before moving forward.
You can also optimize your Social Security benefits in various ways. For instance, benefits are calculated based on your top 35 highest-earning years. If you’ve worked for less than that, the zeroes are included in the calculations, driving your average down. Moreover, if you delay your retirement, you could qualify for even higher benefits than retiring as soon as you can. Other benefits such as spousal, survivor, or dependent benefits can affect your Social Security payout, though each of these comes with its own conditions to be satisfied first.
Strategies for Tax-Free Retirement Income in Your 70s and Beyond
Whether you’re already retired or on the cusp, there are a few strategies that can stretch your retirement money further. As many investment tools made for retirement planning such as IRAs and 401(k)s may carry required minimum distributions (or RMDs) to avoid penalties, be sure to manage those distributions effectively. If you still have any taxable income, you can reduce it further by establishing a charitable giving plan. Not only can you use this to build a legacy beyond what you give your family, but find causes you care about within your community and support their work as well.
If you’ve invested in annuities, you may enjoy the tax-free income benefits of a laddered model. In other words, having multiple annuities with different maturity dates rather than relying on one for its singular term. As always, if you maintain a personal investment portfolio, continue to monitor it for various tax-efficient strategies, keeping it diversified, and take advantage of tax-loss harvesting when you need a counter to any capital gains tax from selling high-performing stocks.
Create a Retirement Strategy with Smart Life Financial
No matter your age or place in your financial journey, these decades-focused strategies can also be read as a simple sequence rather than tied to any specific year in your life. What’s important about building a strong retirement strategy is that you start as soon as you’re able, creating a solid foundation of investment vehicles and good financial habits that, with consistency, will provide for you in the future.
Of course, there’s no one-size-fits-all method to retirement planning. That’s why we’re here to help. Reach out to the helpful experts at Smart Life Financial and we’ll be happy to get you started on your journey to retirement.
