Ten Non-Taxable Types of Retirement Income

Just because you’ve stopped working doesn’t mean you’re no longer required to pay taxes. Much of your retirement income may be taxed, even if it’s not directly from employment. But, if you play your cards well, not all of it is liable to federal taxes. You can or may be able to avoid paying federal income taxes on the retirement income listed below.

1. Stimulus payments

According to the IRS, the first two rounds of coronavirus stimulus payments approved by federal laws enacted in 2020 and the third round of payments authorized in March 2021 aren’t taxable income. Technically, these are tax credit advance payments. In reality, stimulus payments won’t affect taxes on Social Security income.

2. Social Security benefits

If your “combined income,” as defined by the Social Security Administration, is less than a specific level, you won’t be taxed on your Social Security retirement payments. The precise amount is determined by whether you file as an unmarried individual, jointly with your spouse, or separately from your spouse. The details are available on the Social Security Administration’s website. Even if your total income is large enough that you would be required to pay taxes on your benefits, there are legal ways to avoid this. 

3. Health savings account (HSA) distributions

Health savings accounts are popular because of their tax advantages. Basically, donations to an HSA are tax-deductible, the funds grow tax-free, and withdrawals are tax-free when used for qualified medical costs. So, if you follow the IRS requirements for this sort of account, you’ll never pay federal taxes on the money you put into an HSA.

4. Reverse mortgage payments

The IRS states unequivocally: “Payments on reverse mortgages aren’t taxed.” The federal agency views them as loan proceeds rather than income. You won’t have to pay federal income taxes on the funds you get, regardless of whether you get them as a lump amount, a monthly advance, a line of credit, or all three.

5. Roth IRA payouts 

A Roth individual retirement account (IRA) has one benefit over a traditional IRA in that eligible distributions aren’t taxed. Distributions received upon or after reaching age 59 1/2 are often among those that can be considered “qualified.” That doesn’t imply you’re completely exempt from paying taxes.

Deposits into a Roth IRA vary from traditional IRA deposits in that you pay federal income taxes on them in the tax year in which you earned the money rather than the year in which you withdrew the money. You’re paying on the front end rather than the rear end. That typically makes Roth accounts appealing to those who wish to avoid paying taxes in retirement or who expect to be in a higher tax bracket during retirement than they were during their working years.

6. Life insurance payouts

According to the IRS, the funds of a life insurance policy received due to the insured person’s death aren’t usually considered taxable income. You’re not even required to record the proceeds on your federal income tax filings. However, all interest is taxed.

7. Interest on municipal bonds

Municipal bonds are effectively loans to state or local governments, and the federal government would be impolite to tax you on any income you get from such loans. The IRS even calls them  “tax-exempt governmental bonds.” That doesn’t mean that municipal bond interest is entirely tax-free. You may have to pay in other ways. For example, municipal bond interest earnings may increase your total income to the point where you must pay federal taxes on your Social Security payments.

8. Profit from the sale of your home

Depending on how much you gained, capital gains on the sale of your primary residence may not be liable to federal income tax. “You might be able to exclude up to $250,000 of that gain from your income, or up to $500,000 if you file a joint return with your spouse,” according to the IRS. To qualify for this tax break, you must have owned the property and used it as your primary residence for at least two of the five years before the sale.

9. Benefits for veterans

A wide range of benefits provided by the United States Department of Veterans Affairs (VA) are not considered income. These benefits are detailed in IRS Publication 525 and include:

• Disability compensation and disability pension payments paid to veterans or their families.
• Proceeds from veterans’ insurance and dividends distributed to veterans or their beneficiaries
• Interest earned on insurance dividends deposited with the VA.

10. Volunteering reimbursements and costs

Certain types of funds received as a result of voluntary labor for government programs are exempt from federal taxation. According to IRS Publication 525, these include numerous volunteer reimbursements in:

• National Senior Service Corps programs
• The Elderly Tax Counseling Program
• The Service Corps of Retired Executives (SCORE)

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Bio:
After entering the financial services industry in 1994, it was a desire to guide people towards their financial independence that drove Aaron to start Steele Capital Management in 2013. Armed with an extensive background in financial planning and commercial banking coupled with a sincere passion for helping people, Aaron has the expertise and affinity for serving the unique needs of those in transition. Clients benefit from his objective financial solutions and education aligned solely with
helping them pursue the most comfortable financial life possible.

Born in Olympia, Washington, Aaron spent much of his childhood in Denver, Colorado. An area outside of Phoenix, Arizona, known as the East Valley, occupies a special place in Aaron’s heart. It is where he graduated from Arizona State University with a Bachelor of Science degree in Business Administration, started a family, and advanced his professional career.

Having now returned to his hometown of Olympia, and with the days of coaching his sons football and baseball teams behind him, he now has time to pursue his civic passions. Aaron is proud to serve on the Board of Regents Leadership for Thurston County as the Secretary and Treasurer for the Morningside area. His past affiliations include the West Olympia Rotary and has served on various committees for organizations throughout his community.

Aaron and his beautiful wife, Holly, a Registered Nurse, consider their greatest accomplishment having raised Thomas and Tate, their two intelligent and motivated sons. Their oldest son Tate is following in his father’s entrepreneurial footsteps and currently attends the Carson College of Business at Washington State University. Their beloved youngest son, Thomas, is a student at Olympia High School.

Focused on helping veterans and their families navigate the maze of long-term care solutions, Aaron specializes in customized strategies to avoid the financial crisis that care related expenses can create. Experience has shown him that many seniors are not prepared for the economic transition that takes place as they reach an advanced age.

With support from the American Academy of Benefit Planners – an organization with expertise and resources on the intricacies of government benefits – he helps clients close the gap between the cost of care and their income while protecting their assets from depletion.

Aaron can help you and your family to create, preserve and protect your legacy.

That’s making a difference.

Disclosure:
Disclosure:
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