Are you looking for the types of income that are not taxable?

If you are worried that your retirement income is going to be subject to a lot of taxes, then you should look into the options you have to access the types that will not be subject to them. The truth is that while there are a lot of retirement funds that are subject to income tax, not all of them are going to be cut down due to taxes, and you can take advantage of them even before you are retired!

We have looked into the best ways in which you can supplement your income in ways that are not going to add on extra taxes, so that you do not have to spend too much time finding this information. Be it that these funds are going to come from accounts you already have and are worried they may be taxed, or they are going to be income you receive from someone else, here is a breakdown of the types of retirement income that is not going to be taxed!

Let us know if you already have some of these accounts or if you have been using them ever since you retiered!

Inheritances

Generally speaking, this should not be your number one plan when it comes to having a retirement plan, since it is never known for sure that you are going to receive an inheritance. This is in addition to the fact that the amount may not be enough to live on. However, it is known that most Americans will inherit a sum of money at some point in their lives, so you may be among the lucky ones who end up getting some money by way of inheritance.

No matter how big or small the inheritance you will receive is going to be, you can take it as a good way to supplement your nest egg and add to your savings. The best thing about it is that inheritances are generally tax-free, so you will not have to pay income tax on it. Things can get a little bit complicated when we are looking at estate taxes if the inheritance is part of an estate, but the beneficiaries do not have to pay taxes for estate taxes in most cases either.

It’s something to think about if you know you could receive money from an estranged aunt!

HSA Withdrawals

If you are looking for a way to have an income by saving over the years, especially if you are saving with the intention to use that part of your income for health purposes, then opening a health savings account (HSA) is the best way to go about it. These types of accounts end up being a combination of all the best features that traditional and Roth IRAs offer, yet in one easy-to-access package.

To start with, when you make contributions towards an HSA account, you will be able to get a tax deduction for that amount, so growing this account over your employment years is not going to be a financial burden. Not to mention, HSA accounts grow tax-free, no matter how many earnings there are.

When it comes to using the money from these accounts, any withdrawal you make that goes towards a qualified health expense (which, let’s be honest, is a very broad term) is not going to be taxed. The drawback for these types of accounts is the fact that if you are not going to use the money for health reasons until you reach the age of 65, the penalty fee is steep: up to 20%! However, once you turn 65, any withdrawal is not going to face penalties.

When it comes to how that money is taxed in terms of after you are a retiree, if you are using it for non-health-related reasons, you are going to have to pay income tax on that amount. Yet, if they go towards any healthcare expense, which is the best way to use such accounts, they are going to be tax-free funds!

If you want to know more about the American healthcare system and how it works, we recommend you read this book on the subject!

Risky Bet: Social Security Payments

We say risky because whether or not your Social Security payments are going to be taxed depends on what state you live in and the amount you are receiving from these payments. For some, Social Security payments are not going to be taxed no matter what, but for many, that is not the case.

If you plan to live off your Social Security retirement payments alone, then you are safe when it comes to income tax. Yet, if you have other income as well and you earn over a certain threshold, then you will have to pay taxes on some or most of your payments.

When looking at how Social Security was taxed in 2022, we can see that people who had under $25,000 in combined income did not pay taxes, but those who had a combined income of up to $34,000 had to pay taxes on up to 50% of the benefit amount they received. Those who had earned over the threshold of $34,000 had to deal with up to 85% of their income from Social Security being taxed. And this happens even when you are going over by just a couple hundred dollars.

If you are a joint filler, they started to be taxed up to 50% on incomes between $25,000 and $44,000, with those that went over the larger sum going up to possibly facing 85% taxes on their income from these payments.

If you were wondering, “combined income” is defined by the Social Security Administration as the adjusted gross income together with the interest that is not subject to taxes and half of the Social Security benefits! More information about this can be found on the government’s site!

Life Insurance Proceeds

Much like we talked about in the inheritance portion of this article, life insurance proceeds are not a solid retirement fund plan. However, it is something that you should have, and there is a high chance that you may be the beneficiary of an insurance plan payout, which will significantly impact your retirement income when it comes to receiving that money.

But will you have to pay for this extra income that ends up being bestowed on you? Happily enough, much like in the case of inheritances, you will not have to pay taxes on the money you receive from the proceeds of a life insurance plan. But this is generally viable if you end up receiving the whole sum in full, because if you end up receiving it in installments, the rules of the game may change depending on various circumstances.

Despite this, it is still good news if you know you are the beneficiary of someone’s life insurance.

Roth Withdrawals

If you have a retirement savings account, be it a traditional IRA or a 401(k) plan, you should probably look into Roth accounts and maybe think about making the switch. In the end, out of all the savings accounts for retirement and a way to keep your income stable during your senior years, Roth accounts end up being the best choice if you do not want to pay taxes at that moment.

Roth accounts may not offer you the option to put them up for tax deductions, but they will end up giving you the benefit of making tax-free withdrawals at any time you may want to after the age of 59 and a half (a very specific age, we know).

The way these accounts work is that you are going to pay the taxes related to your contributions when you are making them, instead of having to pay them when you distribute the funds later down the line. The tricky thing is that you cannot set up a Roth account and make contributions if your income ends up passing the threshold named in the regulations (which is $144,000 for single filers and $214,000 for joint ones).

You can always transform your traditional plan into a Roth one; however, you will have to pay income tax on the amount you are withdrawing, which would be like you had withdrawn the money. This is not pleasant, especially if the sum is pretty big.

The best course of action is to open a Roth account as early as possible (so talk to your younger relatives about them now) or to switch to one if you can as soon as possible, rather than face the big taxes when you are in your peak earning period!

And with the tax season being closer than ever, make sure that you check out these necessary tips to make sure you are not paying more in taxes than you should be!