You’ve always been a hard worker and a conscientious taxpayer, waiting for your retirement day to come so you can stop paying all those taxes and start collecting your hard-earned benefits.
But just because you are leaving the workforce, doesn’t mean Uncle Sam is done with you. Much of your retirement income, even if coming from other sources than employment, can still be taxed. Luckily, if you play by the rules and go by the IRS book, you might be able to dodge paying federal income taxes on these 8 types of retirement income. Start taking notes!
Roth IRA Distributions
When it comes to Roth IRA distributions, you are not entirely escaping taxes, but you can avoid taxation when you need it most: in retirement. Roth IRA differs from a traditional IRA in that federal taxes on Roth IRA contributions have to be paid for the tax year in which you earned the money, in contrast to the year in which you withdraw the money.
Your Roth IRA contributions will not be subjected to taxes or penalties and will continue to grow until you’ve reached the age that qualifies you to take distributions. IRS rules for tax-free qualified distributions:
- Your account was opened at least five years prior
- You are older than 59 ½
Compared to other investment methods, Roth IRAs allow you to leave your money in the account for as long as you want, without being forced to take the required minimum distributions (RMD) associated with traditional IRAs.