Retirees Don't Have To Pay Taxes on These Kinds of Income

If you’re saving for retirement, preparing yourself financially to meet your goals is a priority. But it’s also important to plan for taxes.

If you’re using a traditional taxable brokerage account, your investments could face significant taxation.

On the other hand, some types of retirement income are not taxable. Focusing on these could mean sending less of what you’re earning to the government.

Find Out: 8 must-do things before 60 for a stress-free retirement

1. Health savings account distributions

If you plan to retire — or even retire early — soon, be sure to contribute to your employee-provided HSA. You‘ll be glad you have access to tax-free funds for medical expenses.

A health savings account (HSA) offers tax advantages. Your contributions are tax-deductible, and the funds grow in your HAS tax-free.

When it comes time to use those funds for qualified expenses, no taxes are applied to your withdrawals as long as you use the funds for medical expenses.

Do you owe the IRS over $10K? Ask this company to help you eliminate your late tax debt.

2. Social Security payments

Social Security payments are typically not taxable. However, depending on how much you receive, you may have to pay taxes on them.

If you have a combined income of $25,000 to $34,000, you may have to pay taxes on half of your income. If you earn more than that, you could pay tax on up to 85% of your earnings.

Joint filers earning between $32,000 and $44,000 may pay taxes on half of their earnings, while those bringing in more than this amount could pay taxes on up to 85%.

3. Roth withdrawals

As you’re selecting the best type of retirement account for your future , there may not be a better option for reducing your tax burden than a Roth.

You can structure an IRA or a 401(k) as a Roth account, so you have some options. With this retirement strategy, you’ll invest your money after you’ve paid taxes on it. The money then grows in your Roth account until you reach at least 59 1/2 years of age.

At that point, any withdrawals you make are tax-free. In short, you’re paying taxes on these funds upfront and letting them grow tax-free to build your retirement portfolio.

4. Reverse mortgage payments

With a reverse mortgage, you’re borrowing money using the home as security. What’s more, payments you receive from your reverse mortgage are not taxable.

You don’t make monthly payments on a reverse mortgage. Rather, the repayment of the borrowed funds comes due when you no longer live in that home. If the loan isn’t repaid, the lender can sell the home to recoup the investment.

A reverse mortgage isn’t for everyone. They have high fees and should be carefully considered, even with the benefit of not having taxes levied on payments.

5. Life insurance benefits

Life insurance is typically meant to pay a lump sum to your named beneficiary after your death. However, you may also receive proceeds from a life insurance policy during your lifetime.

If you’re listed as the beneficiary on a life insurance policy and receive the payout, you don’t have to pay taxes on those funds. That could mean thousands of non-taxable dollars added to your retirement funds.

6. Veteran's benefits

Any benefits paid to you through the U.S. Department of Veterans Affairs are not taxable. This could include any disability compensation you receive and pension payments for disabilities.

No taxes are applied to insurance proceeds you receive or dividends paid to you or your beneficiaries. Any interest that builds on deposits you’ve left with the organization that leads to dividend payments is also not taxed.

7. Public assistance benefits

Seniors who qualify for public assistance benefits don’t have to worry about paying taxes on those funds. This includes any support you receive through mortgage assistance programs, crime victim payments, Medicare benefits, or state reemployment assistance.

If you qualify for and receive support in the form of food benefits through the Nutrition Program for the Elderly, those are not taxable benefits either. Most types of welfare benefits are also not taxed.

Though designed to meet the needs of lower-income individuals, you should take advantage of these programs if you qualify.

8. Profits from selling your home

Are you planning to sell your home , perhaps to downsize? If you meet the ownership and use tests established by the IRS, you may not have to pay capital gains tax on the sale of your home.

You’ll need to have owned your home for at least five years, and it must be your primary residence for at least two of those years. If you sell it, you won’t have to pay taxes on up to $250,000 of your gains if you’re an individual or $500,000 if you’re married and filing jointly.

9. Bonds

Municipal bonds may not be something you’ve thought about purchasing, but they can provide a nice little chunk of tax-free earnings depending on how many you purchase.

Most people have to pay taxes on federal and state bonds when they receive income, but that doesn’t apply to municipal bonds issued by states or other government organizations.

Be sure to double-check your state and local laws regarding these taxes, even though bond income isn’t taxed at the federal level.

10. Inheritance

You may not be able to count on the proceeds from an inheritance for your retirement income — unless you already know what’s coming your way.

While you won’t have to pay taxes on any inheritance you receive , estates over a certain size may be subject to estate taxes. However, these taxes are paid by the estate itself and not you.

The federal estate tax exemption is $13.61 million for 2024. Any amount over the exemption is subject to tax.

Bottom line

These are solid ways to add some income to your retirement and make money moves by not having to pay extra taxes.

However, if you use an inheritance or other sources of non-taxed income to make money during your retirement — such as investing them — those new dividends could be taxed.

Money tips that can work for everyone

No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.

Focus on paying off your debt . Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.

Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.

Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).