We’re in the final crunch in this year’s tax season, so we’re going to explore how you can keep more of what you earn during retirement.
If you play by the rules, you can keep some of your retirement income away from the IRS. If you have planned, saved, and are relying on a steady income for a comfortable retirement, there are several categories of income that are tax-free.
Here are ten you should know about:
1. Roth IRA Distributions
A Roth IRA has one advantage over the traditional IRA: When you withdraw from your account, those withdrawals are not taxable. You also paid no taxes on whatever interest your account accumulated over the years.
However, unlike a regular IRA where you can get a tax deduction during the year you add to your account, the Roth IRA provides no immediate tax benefit, other than tax-exempt interest.
2. Proceeds from a Life Insurance Policy
Money from a life insurance policy after the insured person’s death is not considered taxable income. The beneficiary does not have to report the income on federal tax returns, but any interest earned on the cash is taxable.
3. Municipal Bond Interest Payments
A municipal bond is a loan that investors make to state or local governments. The IRS refers to municipal bonds as tax-exempt government bonds. However, if your earnings from municipal bond interest raises your combined income to a certain level, you could enter the income that imposes taxes on your Social Security Benefits.
4. Social Security Benefits (for some)
If your combined income is below a certain amount, you are not taxed on your Social Security benefits. For details see our article on how to limit the tax impact on your Social Security income.
5. Profit from Selling a Home
If you used your home as your primary residence for at least two years of the five years prior to selling the home, you can exclude up to $250,000 ($500,000 for joint filers) in the profits of the sale from income tax.
6. Income from Reverse Mortgage Payments
The IRS says it best: “Reverse mortgage payments aren’t taxable.” The IRS considers that income loan proceeds, not income, for seniors past age 62, who convert their home equity into cash income.
7. VA benefits
IRS Publication 525 lists a wide variety of non-taxable VA benefits. They include disability compensation and pension payments, VA insurance proceeds, and insurance dividends on deposit with the VA.
8. Some reimbursement income received for federal volunteer programs
IRS publication 525 also lists tax-exempt reimbursements for volunteers who donate their time and expertise in the following federal volunteer programs:
- The Tax Counseling for the Elderly program
- SCORE–The Service Corps of Retired Executives
- National Senior Service Corps
9. Distributions from Health Savings Accounts
This is double good news: Contributions to health savings accounts are tax-deductible, and grow tax-free. Secondly, when you withdraw the money for eligible medical expenses, those distributions are aslo tax-free.
10. Coronavirus Stimulus Payments
The three rounds of federal coronavirus stimulus payments authorized by Congress in 2020 and 2021 are not taxable. The IRS considers that money as advance tax credit payments. Those payments will also not affect your taxes on Social Security income.