Home Articles Why it’s Worth Paying for “Tax-Free”

Why it’s Worth Paying for “Tax-Free”

One common approach is to move tax-deferred money into tax-free (also known as tax-exempt) accounts. As mentioned above, a Traditional IRA is a tax-deferred account, but a Roth IRA is tax-exempt. Taking money out of a tax-deferred account, whether to spend or to move to a tax-free account, will trigger a tax bill. Whatever money you take out will be counted as taxable. However, once you’ve paid the taxes and moved it into a tax-free account, any future earnings will not be taxable. And since you already paid taxes on the money you put in, that means that account doesn’t trigger any taxes for the rest of your life.

It’s important not to move all the money at once – this will rocket you into a much higher tax bracket and the government will take a huge chunk, not just on the money you are moving, but on all of your other income that year too. Instead, work with an advisor to check how much “wiggle room” you have until you reach the top of your current bracket (or maybe one bracket higher). Then you can “fill” your bracket with a distribution from your tax-deferred account. You’ll pay extra taxes that year than you usually would, but if you do it right, it shouldn’t be anything truly extraordinary.

If you make a small move like this each year over the course of several years, then you will make a big dent in the amount of taxable money you have if and when rates start to increase. Breaking the strategy up over time also allows you to react to changes in tax law as it happens, instead of trying to play catch up when it’s too late.

Another option is to take your taxable distributions and, instead of putting them into another retirement account, buying life insurance. There are a wide range of these products to fit many different needs and preferences, including many that have benefits while you are still living. Annuities could also be an option. Just like a Roth IRA, the money you and/or your heirs get from these products at the end is tax-free.


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Finishing Wellhttps://www.cardinalguide.com/finishing-well/
Retirement planning involves a lot more than just managing your money. This show is the complete guide to planning for and living in retirement, helping families finish well. Host Hans Scheil will discuss a new topic every week ranging from Social Security and Medicare to IRAs and taxes. Follow along each week by downloading the corresponding chapters below for free! New episodes air: Finishing Well Schedule on Truth Network
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