Take Advantage Of The 6 Non-Taxable Retirement Funds

The impact of taxes on retirement planning is often overlooked. Without adequate planning, taxes can consume a substantial portion of your savings.

For instance, a $1,000,000 portfolio in a 401(k) or conventional IRA may be worth $800,000 or less after taxes. Similarly, if your assets are held in a standard, taxable brokerage account, the income generated by those funds may be subject to taxation.

One strategy to circumvent this issue is to save and invest more during your working lifetime to have more funds to pay taxes. To limit your tax bill to an absolute minimum, you should also choose tax-aware investments and accounts. Here are numerous tax-exempt sources of retirement income.

Roth Distributions

Using a Roth account is the simplest approach to avoid paying taxes on retirement funds. IRAs and 401(k)s may be set up as Roth accounts, which do not give a tax deduction on contributions but permit tax-free withdrawals after age 59.5.

Essentially, with a Roth account, you pay your taxes at the time of your contribution rather than when you withdraw your funds. While you cannot contribute to a Roth if your income surpasses specified thresholds — $144,000 for single filers and $214,000 for joint filers — you can convert your regular plan to a Roth anytime. However, you must pay income taxes on the converted amount, just as if you had withdrawn the funds.

As a result, it is often more prudent to open a Roth account early in your career than to face a hefty tax payment during your prime earning years.


As a rule, relying on an inheritance as a retirement plan is not prudent. Firstly, getting an inheritance is never certain, and secondly, the amount bequeathed is never sufficient to sustain a lengthy retirement.

However, many Americans get an inheritance at some point in life, which may frequently be a useful complement to retirement funds. The greatest financial benefit of inheritance is that money is tax-free. Even if there is an estate tax, which is quite uncommon, the recipients are not liable for paying it.

Municipal Bond Income

Municipal bonds are issued by states, towns, and other municipalities to finance projects such as schools, roads, and other goods for public welfare. Municipal bonds are exempt from federal taxation, so investors are not required to pay taxes on the interest gained from municipal bonds.

You are often free from paying state taxes if you purchase a state-issued bond, making municipal bonds more advantageous in places with high taxes, such as California. In addition to being tax-exempt, they may be a valuable source of retirement income because they are typically secure investments.

HSA Withdrawals

A health savings account (HSA) combines the finest features of traditional and Roth IRAs. Contributions to an HSA qualify for a tax deduction, and profits grow tax-free.

Withdrawals are tax-exempt when used for qualified healthcare costs, a broad category. Otherwise, a 20% penalty will be imposed on your withdrawals. Regarding retirement planning, however, the clincher is that after you reach age 65, you can take your HSA funds for any reason without incurring a penalty.

When utilized for reasons other than healthcare, you will still be subject to regular income tax, but you can escape the penalty. The optimum use of an HSA will always be for healthcare costs, even though tax-free withdrawals are permitted at any time.

Payments from the Social Security Administration

Social Security benefits are often not taxed, although this is not always the case. It is true that Social Security retirement payments are tax-free if they are your sole source of income. However, if your income exceeds a specific threshold, a portion or perhaps most of your payments become taxed. Here is how Social Security will be taxed in 2022, based on income and filing status:

Individuals with a combined income between $25,000 and $34,000 may be required to pay tax on up to 50% of their benefits, while those with earnings over $34,000 may be required to pay tax on up to 85% of their Social Security income.

For joint filers with incomes between $32,000 and $44,000, up to 50% of Social Security income is taxable; those earning more pay tax on up to 85% of benefits.

The Social Security Administration defines “combined income” as the sum of an individual’s adjusted gross income, nontaxable interest, and one-half of their Social Security payments.

Life Insurance Benefits

As with an inheritance, relying on a life insurance payment to support retirement is not optimal. However, you may likely receive some life insurance payments during your senior years.

These payouts are frequently in the hundreds of thousands of dollars, so they may substantially influence your retirement funds. Similarly to inheritances, life insurance proceeds are tax-free if received in a single amount rather than in installments.