The 3 legal ways to Build a Tax Free Retirement (Part 1)

There’s a reason why CPA Ed Slott, one of the nation’s leading tax expert, says that taxes are the biggest risk you’ll face in retirement. In order to cover the skyrocketing debt and obligations like social security and Medicare, tax rates must double in order to pay for everything.

Don’t believe me? Just ask David M. Walker, former Comptroller General for the US Government Accountability Office. He was recently quoted as saying “based on the current fiscal path, future tax rates will have to double or our country could go bankrupt.” This means you must be looking for ways to generate tax free retirement income so you don’t get hit with a huge tax bill by deferring taxes until retirement.

There are three ways money is taxed as it grows and accumulates; taxed, tax deferred, and tax-advantaged. Below I highlight the pros and cons of the last remaining tax advantaged ways you can build your retirement income.

The 1st way is through buying Municipal Bonds; they’re a form of Government bonds. The good news is that when done properly they generally grow tax-free, giving you tax-free interest. But why do you think these are not very popular? In other words, what’s the downside? That’s right, a low rate-of-return. Remember, there are 2 battles we have to win. With bonds you may be winning the tax battle, but not the rate-of-return battle.

Also with municipalities going bankrupt left and right, they may not be as secure as they used to be.

The 2nd option is a Roth IRA or Roth 401K . The good news is that they grow tax-free and you can potentially pull the money out tax-free, but the downsides are:

1.) You are restricted on what you can contribute based on your age and income, If your income exceeds certain limits, you can’t contribute. For example if you file jointly and make more than $191,000 you cannot contribute to a Roth IRA.

2.) For both the Roth IRA and Roth 401K you have to wait until you’re 59 ½ to take out any growth. If you pull money out before that age there is a 10% penalty plus taxes. So if you want to retire prior to 59 ½, you’ll take a serious hit. This penalty can be forgiven for a limited number of expenses like using the money to buy your primary residence or as a college fund.

3.) In order to qualify for money from the Government for college, Medicaid, Medicare and Social Security benefits, one might have to spend down their ROTH to get it. So the Government gives us an advantage in one area, but then takes it away in other areas to make up for it.

See part 2 of The Three Legal Ways To Build a Tax Free Retirement in my next post!!!