Building a Tax-Free Retirement Income Bucket
Most retirement savings fall into three categories:
1️⃣ Taxable: Brokerage accounts and other investments that may generate taxable income or gains
2️⃣ Tax-deferred: Traditional 401(k)s and IRAs, where withdrawals are generally taxable
3️⃣ Potentially tax-free: Roth accounts and certain other qualified income sources
Roth IRA and Roth 401(k) contributions are made with after-tax dollars. When applicable requirements are met, qualified withdrawals are tax-free.
A Roth conversion moves money from a traditional retirement account into a Roth account. The converted amount is generally taxable in the year of conversion, so timing, available cash, and the potential effect on other tax items should be carefully reviewed.
Other potential sources of tax-free retirement income may include:
• Health Savings Account withdrawals used for qualified medical expenses
• Interest from certain municipal bonds
• Properly structured withdrawals from cash-value life insurance, subject to policy terms and tax rules
Why does tax diversification matter?
Having money across different tax categories may provide greater flexibility when deciding where retirement income should come from each year. It can also help retirees manage taxable income as their needs and tax laws change.
The goal is to pay taxes at the lowest tax rate possible and to create more choices on where to access funds.
Tax and financial planning should be coordinated with qualified professionals based on your individual circumstances.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Traditional IRA and 401(k) withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Roth IRA withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
For Roth IRA conversions, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
If you withdraw money from a Health Savings Account (HSA) for non-medical expenses before age 65, you must pay regular income tax plus a 20% penalty.
Withdrawals from cash-value life insurance can reduce death benefits.