A big misconception that many people have about retirement is that they don’t have to pay a lot of taxes. In fact, the IRS can take a cut of the pie from many different sources of income.
For example, dividends you receive in a regular brokerage will be taxed, and if you sell an investment at a profit, you’ll face capital gains taxes. If you roll your retirement savings into a traditional IRA or 401(k) plan, those withdrawals will also be taxed. Depending on your situation, even your Social Security benefits may be taxable.
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The good news is, there’s a simple way to get tax-free income in retirement. But in some cases, you may need to plan ahead.
Roth retirement plans are not funded on a pre-tax basis like traditional retirement accounts. But they offer the benefit of tax-free gains and withdrawals.
However, there is a problem. You are not always able to directly fund a Roth retirement plan.
If your income is too high, you will be prohibited from making contributions to a Roth IRA. This is also impossible if your company doesn’t offer a Roth 401(k) or retirement plan at all.
In this case, you could contribute to a traditional retirement account and do a Roth conversion, which allows you to withdraw from your savings later in life without having to pay taxes on the money. But Rose’s transition is something you need to time very carefully.
When you make a Roth conversion, the funds you transfer count as taxable income for the year. This could have a huge impact.
On the one hand, Rose’s transformation can push you to a higher level. But it could also impact your finances.
If you make a Roth conversion this year and plan to enroll in Medicare within two years, you may face a surcharge on your Part B premiums as your income reaches a certain level in 2026. Therefore, it is important to plan Rose’s transition carefully. If you want to transfer a large sum of money to a Roth, you may want to spread it over several years to minimize the tax impact.
But all in all, if you like the idea of sheltering at least some of your retirement income from taxes, it’s worth finding a way to save in a Roth account. You may not be able to contribute directly, but that doesn’t have to stop you, as long as you plan accordingly.
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This May Be the Easiest Way to Earn Tax-Free Income in Retirement Originally Posted by The Motley Fool