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Legal Tax-Free Retirement Strategies That You Need to Know

Legal Tax-Free Retirement Strategies That You Need to Know

| June 28, 2020
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Saving for retirement should be a priority for anyone. If you're not smart about that saving, the money you put away will be chipped away every year, courtesy of Uncle Sam. To help you avoid that situation, we've put together a quick guide of 6 tax-free retirement strategies you can count on.

RELATED: The Pre-Retirement Checklist

In This Article:

  1. 401(k)
  2. 403(b)
  3. Roth IRA
  4. Life Insurance
  5. HSA
  6. Municipal Bond ETFs
  7. Why Hire a Tax Strategist?

7 Tax-Free Retirement Funds


Contributing to a 401(k) is incredibly easy. In fact, the contributions you make are pretax. That means that if you are making $5000/month, you can request $1000 of that be sent directly to your 401(k) without being taxed. You then get taxed only on the remaining $4000.

You hardly have to pay any fees on the money kept in your 401(k). There are some small administrative fees, but they are negligible compared to the taxes you get to avoid.

Not only that, but the money in your 401(k) will grow over time because of two reasons. First of all, many employers match your contributions to the fund. Second, 401(k) money is often converted automatically into bonds and other assets that will multiply as time goes on.

You may withdraw the money in your 401(k) after retirement, or before if you pay a hefty fee to do so. Withdrawals are taxed, but the rate is the same no matter how long the money has been sitting in the fund.



A 403(b) is much the same as a 401(k), but it is only available to those who work for non-profits. It does have two significant differences from 401(k), though, one of them good and one of them not so good.

On the bright side, administration fees are lower. This only results in savings of about $100/year in most cases, but that's not insignificant for some people.

On the other hand, employers are not allowed to match contributions like with 401(k). This can be a major sticking point, and it's why we recommend using 401(k) instead if possible.


Roth IRA

The one major downside of Roth IRA is that you can only contribute $5,500 per year or $6500 if you are over 49. The contributions you make are not tax-deductible, either.

Other than that, though, it's a fantastic place to save for retirement. The money in the account is entirely tax-free, and it grows at a fantastic rate.

To illustrate how powerful Roth IRA can be if used correctly, consider this: a 22-year-old who puts the full $5,500 into his Roth IRA and continues to do so until he retires at 70 will be able to withdraw $5.25 million of tax-free cash. And that's how you make the most of long-term compound interest.

The last downside only applies to some people. If you are in a higher tax bracket, you cannot contribute money to a Roth IRA.

RELATED: What is a Roth 401(k)?


Cash Value Life Insurance

Some don't see life insurance as an investment because they assume they won't receive any benefits from it while still alive. It is a tax-free money haven, but you won't feel the positive effects of the money yourself, right?.


There are two primary ways a hefty life insurance policy can pay off for the policyholder:

If they withdraw some money from your policy after retirement, but before the age of 59.5, you can do it without incurring any IRS fees.

Those with large life insurance claims receive tons of benefits from both the insurance company and the government during retirement.

Besides, cash value life insurance funds grow over time, and they ensure the holder will be able to pass on a substantial amount of wealth after death.



Health savings accounts are a cool way for Americans to provide their own "free health care" and save for retirement in the process.

First, be aware that only some people can contribute to HSAs. Check with a financial strategist to see if you're eligible. Also, know you can only contribute $3,450/year, or $4,450/year, even if you do qualify.

If you have an HSA and you make regular payments, you do not have to pay for your medical procedures before retirement as long as they are covered in your plan. Instead, you "put them on your tab," so you can pay them back from your HSA once you retire.

By the time you do, though, the money you've been putting in for years will have grown thanks to compound, tax-free interest exponentially. You'll more than likely be able to pay off all your medical bills and have a hefty chunk of change for your retirement fund.


Municipal Bond ETFs

Unlike most tax-free retirement strategies, municipal bonds are a kind of investment and, therefore, technically incur some risk. The risk is extremely low, though, since the bonds are backed by the US government.

In fact, most municipal bond ETFs will grow a lot over time, and that growth will be totally tax-free until you take your money out!

Unfortunately, finding municipal bonds that are genuinely tax-free on both state and federal levels is pretty tough. We highly recommend you leave your bond trading to a pro who can pick out the best municipal bonds on the market tailored to your tastes and your wallet.


Why Hire a Tax Strategist?

All of the above options are great tax-free retirement strategies if handled correctly, but that's a lot easier said than done. The government and other borrowing agencies don't make it simple to avoid taxes, and transactions generally need to check off an unbelievably long list of boxes to avoid additional fees or taxes.

The delicate nature of the transactions makes it almost essential that you hire a specialist like one of those at Summit Wealth.


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