How Do I Start Building a Tax-Free Retirement?

Today we’re exploring how you can begin building a tax-free retirement. Doing so may seem impossible, as taxes are lurking around every corner: sales tax, real estate taxes, income taxes, and many others. However, if you plan early, you can develop a plan to pay no taxes in retirement, and I'm excited to present this strategy to you.?

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I want to ask the same question I ask in all my public workshops: are tax rates currently high? Before we answer, let's review some history of tax rates using a familiar name, Ronald Reagan. Whether you liked Ronald Reagan or not as a president, his first career was acting. Post-war, he made two films yearly, earning roughly $100,000 each. Typically, he was done filming halfway through the year and would take the rest of the year off, which seems like a comfortable lifestyle for an actor. However, he worked this way because every dollar he made over the first $200,000 would be taxed at 90%! How could such rates even exist??

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Over the last few years, we've experienced tax cuts as a result of the passage of the Tax Cuts and Jobs Act, resulting in some of the lowest rates we've seen historically in a generation. Where do you think tax rates will go from here? We're likely going to experience higher rates than we are now. As I discussed in a recent article on avoiding paying too much taxes in retirement, many of you will be in the crosshairs of the IRS if you have tax-deferred accounts. Start taking advantage of this window of opportunity with low tax rates and high standard deductions before they disappear: get going while the getting is good.?

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First, move your money intelligently from forever-taxed accounts to never-again-taxed accounts. If you have an IRA, a 401K, a 403B, a 457, or any other tax-deferred investment, you invested on the assumption that one day, once you retire, your tax rates would be lower. However, you'll likely be spending as much or more during these years when you have increased discretionary time.?

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The solution to this dilemma is to gradually move your money from tax-deferred accounts to accounts that will never be taxed again. The catch is to pay your taxes now, enduring short-term pain for long-term gain. For example, converting assets from an IRA to a Roth IRA will allow them to grow tax-free if done correctly. It will enable you to have tax-free access to your money and the ability to transfer it tax-free to your beneficiaries. The goal is to get the IRS disinherited from your accounts.?

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One potential issue with this strategy is that you may currently be in a high tax bracket, depending on your income; a high income may limit your opportunities. At Lord and Richards, we use a Financial Independence Roadmap? to develop a sophisticated plan to move money at favorable rates; a Roth conversion is one way to do this. Additionally, some of you can still contribute to a Roth IRA or a Roth 401K.?

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Many people run into limitations when trying to contribute to a Roth IRA due to their income. One way to get around this is through a "backdoor Roth IRA." Contribute to a traditional IRA or 401K and then convert to a Roth account to take advantage of these vehicles. These loopholes are written into the plan to be a benefit, and the government makes out just fine; they're profiting from your taxes on the money today. We pay taxes on the seed to be tax-free on the harvest.?

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Another tool you should take advantage of is the tax benefits of life insurance, or section 7702 plans-- the IRS code associated with the taxation of life insurance. Many rules, acts of Congress, and laws are written to prevent people from abusing these benefits. However, I've learned to maximize any tool the IRS or Congress tries to limit for tax savings. While the prevalence of high-cost life insurance policies can deter people, it is possible to custom-design a low-cost, principle-protected plan that will grow tax-free. The key is working with a team of specialists like we have here at Lord and Richards. Whether your ultimate goal is wealth transfer from one generation to the next or to have access to your money tax-free, we can help. This tremendous tool is an arrow that should be in your quiver, ready to use.?

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Lastly, there are tax-free municipal bonds. In the past, we've seen low rates, as the government offsets tax breaks by baking in a poor rate, making this option a less desirable choice.?

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At Lord and Richards, we implement these strategies with expertise and care. Our clients receive comprehensive planning services at no cost; we take care of our fees elsewhere and will gladly chat with you about it. Our goal is not to be exorbitant but accessible to average people: parents, grandparents, co-workers, friends, and neighbors. We'd love to help you build a tax-free retirement and remove anxiety from your future so you can retire financially independent and without worry.?