Let’s Talk Tax-Free Retirement Accounts

Tax-Free Retirement Accounts are a great way to maximize income and capital appreciation without incurring taxes at withdrawal time.


** I want to start by disclosing that certain rules, guidelines, and stipulations are instituted for these types of accounts, and these might not be available or suitable for everyone. Please get in touch with us or your tax professional to learn more. This topic will be for general information purposes only.**

Two things are certain in life, death and taxes. No one likes to pay taxes, and we all try to find solutions to our potential tax liability each year through write-offs, retirement plan contributions, capital losses, etc. However, with some long-term financial planning and due diligence. A skilled financial advisor can assist in creating different avenues of income streams, potentially tax-free. Here is a breakdown of a few top retirement account vehicles we utilize to create tax-free income.

Roth 401(k)

These qualified retirement plans allow for post-tax employee deferrals of $22,500 (2023) and a $7,500 catch-up for employees aged 50 or older. For a younger individual not concerned about tax brackets and AGI, this is a great strategy to grow your money tax-free and, potentially, at retirement, have tax-free withdrawals. With the recently passed SECURE ACT 2.0, employers can now match their employee’s Roth 401(k) deferrals with post-tax contributions. This only allows a company and individual to compound the tax-free contributions for potentially bigger tax-free income at retirement. Win-Win!

Roth IRA

Roth IRAs are great to start as a new investor with employed income because, unlike Roth 401(k) deferrals, there are income limits and thresholds on who can contribute to a Roth IRA. For 2023, individuals earning under $138,000 and under 50 years old can contribute $6,500/year. If you are over 50, there is a catch-up amount of $1,000, bringing the total contribution to $7,500. Let’s do some math… If you are allowed to contribute the mentioned above $6,500 starting at age 21 and never exceed the income threshold for Roth IRAs (Married filing jointly is much higher at $214,000); At 60 years old, with an average of 10% YoY growth, you would have approximately $2,609,410! TAX-FREE! This is a hypothetical situation, but it gives you an idea of how powerful a Roth IRA can be in generating tax-free wealth.

Tax-Free Retirement Account (TFRA)

A tax-free retirement account is not a qualified retirement plan but is designed to generate tax-free income at retirement. Often described as a 7702 plan, these are alternative ways to save for retirement beyond the above-mentioned vehicles. Technically, these aren’t retirement plans at all! Defined as Qualified Life Insurance Contracts funded through a permanent cash value life insurance policy structured as either whole life, variable life, or universal life policies. After-Tax dollars are contributed to the policy, and the cash value grows depending on the investment strategy. Policy owners can take out tax-free loans from the cash value during their lifetime and are free of early withdrawal penalties (like the above plans are subject to until age 59 1/2). Income generated by the policy is also tax-free.

These may seem to be “to-good-to-be-true.” We must remember that these are life insurance policies in the end, and while they enjoy no early withdrawal penalties or taxable income, they could come with higher fees and commissions. The death benefit will also be reduced by the outstanding loan balance (if any) at the time of the insured’s passing.

Tax-free retirement income can come in many forms and fashions. This was not meant to be an exhaustive list, or a one size fits all approach but rather an educational blog to review some of the most popular avenues for generating this type of income. Please consult with your financial planner/tax advisor to review if any of these options suit your situation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.