One of the questions that have to be answered when planning for retirement is, “Where’s my income going to come from.” Identifying the income is a necessary first step when you’re planning. But people often miss the second step—how much of that income will be taxed? Uncle Sam doesn’t give you a pass on taxes just because you’re retired. Most people even have to pay taxes on their Social Security. If you don’t account for your retirement tax bill, the retirement phase of life may not be as care-free as you expected.
As you’re building a solid retirement income plan that will provide all the money you need, be aware of several types of income that don’t get taxed.
Health Savings Account Distributions
If you have money in a health savings account when you retire, you can use that money to pay qualified medical expenses. You don’t have to pay the provider directly. You can pay for it out-of-pocket, then reimburse yourself. Qualified distributions don’t get reported as income and they’re not used in the calculation to determine how much of your Social Security benefit gets taxed. There is an entire strategy for using HSAs for your benefit during your retirement years.
Reverse Mortgage Payments
The IRS says Reverse Mortgage Payments are not taxable. That’s because Reverse Mortgage Payments are considered loan proceeds, not income. And how you receive the money doesn’t matter. Whether you take those payments monthly, as a lump sum, or as a line of credit, there’s no tax liability.
Roth IRA Distributions
The money you contribute to a Roth IRA is always accessible to you tax-free. You didn’t get a tax deduction when you put the money in, so you can take it whenever you want and not get hit with taxes. It’s the earnings you have to be careful of. But once you hit 59 ½, even those can be withdrawn from a Roth tax-free.
Life Insurance Proceeds
Someone you know passes away and you are listed as a beneficiary on their life insurance policy. Do you have to pay taxes on the insurance money you receive? No. The IRS doesn’t consider a life insurance payout taxable and you don’t have to report it on your tax return.
Municipal Bond Interest
Think of municipal bonds as a loan to a state or local government and that entity pays you interest for the use of your money. The IRS considers municipal bonds as tax-exempt government bonds and does not tax you on the interest. And in many cases, if you loaned the money to a municipality in your state of residence, the state doesn’t tax you on the interest either.
Profit from Selling Your Home
Capital gains from selling your primary residence are not taxable as long as the profit is below a government-set threshold. The current IRS code says you can exclude up to $250,000 of gain from selling your house if you are a single tax filer and up to $500,000 if you file a joint return. The house has to have been your primary residence for at least two years.
Veterans Benefits
Some veteran’s benefits paid by the U.S. Department of Veterans Affairs are not taxable including:
- Disability compensation and pension payments
- Veterans’ insurance proceeds and dividends paid to veterans and their beneficiaries
- Interest on insurance dividends left on deposit with the VA
You can find the entire list in IRS Publication 525.
This article is presented as information only and should not be considered tax, legal or financial advice.
