Maximizing every dollar of income is important to most Americans, but it’s especially critical for retirees on a fixed income. Whether you’re still a few years from retirement or already retired, having a solid plan in place can help insure you don’t outlive your nest egg. In an effort to make the most of your money, a recent article discusses strategies for generating tax-free income.1
According to the article, one way to create tax-free income is by investing in municipal and other government bonds. “Not only is the interest paid to you tax-exempt from federal income tax, but it may also be exempt from income tax in your state as well.”1
If you’re still working, you can generate a stream of tax-free income for the future by investing in a Roth IRA. Not only do your contributions and earnings grow tax-free, but withdrawals are tax-free as well. Plus, there’s no required minimum distribution at age 70 ½ like there is with a traditional IRA or 401(k).1
Another option for creating tax-free income is to take advantage of your home equity using one of the following strategies. If you’re looking to downsize, and are planning to sell your home, you can enjoy the benefits of not paying income tax on the profit from the sale. “Single tax filers can exempt the first $250,000 in capital gains on the sale of a primary residence, while married joint filers can double that exemption to $500,000.”1
If you’re not interested in selling and prefer to age in place, you can still benefit from the equity you’ve built up in your home. You can accomplish this via a cash-out refinance, a home equity loan or through a reverse mortgage. The loan proceeds received from these options are tax-free as the funds are not considered income. However, as with any financial decision, it’s important to determine whether the tax benefits outweigh the costs.1
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan. A HECM enables seniors to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3 While you don’t make monthly interest payments with a reverse mortgage, interest does accrue on the balance of the loan. Whereas, with a cash-out refinance or home equity loan, you would be required to make monthly payments, including both interest and principal.
Tapping into your home equity may not be the right choice for everyone. However, if used properly, home equity can be a great tool to generate tax-free cash in retirement. If you’d like to learn more about reverse mortgages or want to find out if you’re eligible, call 800-218-1415.
1 How Can I Earn Tax-Free Income? Here Are 3 Ways – The Motley Fool, by Jason Hall, http://www.fool.com/investing/general/2016/05/20/how-can-i-earn-tax-free-income-here-are-3-ways.aspx.
2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
Author: Meredith Manz