What if I told you that you could generate substantial retirement income without sending a single dollar to the IRS? As a financial advisor who has helped countless clients optimize their retirement strategies, I can confirm this isn’t just wishful thinking—it’s achievable with some proper planning.
The tax code, while complex, offers several legitimate pathways to create tax-free retirement income. And this isn’t about exploiting loopholes—it’s about understanding and strategically using the tax-advantaged options that are available to you.
The Tax-Free Retirement Income Myth
You might think the only way to get tax-free income in retirement is by maxing out your Roth IRAs during your working years. While Roth IRAs are a fantastic tool, they’re not the only path—and sometimes their not always the best one, especially if you’re closer to retirement.
There’s actually a more tailored approach that can work better depending on your situation.
Meet M and J
M and J are a retired couple who wanted to maximize their tax efficiency. Here’s a snapshot of their portfolio when we started working with them:
- $450,000 in a joint brokerage account (invested for growth)
- $700,000 in Roth IRAs
- $200,000 in traditional IRAs
- Social Security benefits: M receives $3,000/month, J gets $1,800/month (about $57,600 annually combined)
Their goal was clear: to generate $100,000 a year in tax-free income during retirement while keeping their tax bill as low as possible.
How We Did It
Here’s how we were able to maximize their income while minimizing their taxes:
- Not taking withdrawals from traditional IRAs (or taking only very small amounts, well below the threshold).
Holding growth stocks in their brokerage account to avoid taxable dividends and interest. - Withdrawing living expenses from their Roth IRAs, which don’t count toward provisional income and are entirely tax-free.
Here’s what it looked like:
Social Security: $57,600 (all tax-free)
Roth IRA withdrawals: $40,000 (all tax-free, not included in provisional income)
Brokerage withdrawals: $2,000 (from principal, not taxable)
Qualified dividends/capital gains: $0–$2,000 (kept minimal; if any, taxed at 0% if within income threshold)
Total spendable income: $99,600–$101,600
Total taxable income: $0–$2,000 (well below thresholds)
The Outcome
M and L now enjoy $100,000 a year in tax-free income without paying federal income tax on it. Even though they’ve got a sizable portfolio and steady Social Security income, the key was how we structured their withdrawals and income streams to minimize taxes.
We also helped them with longer-term strategies like tax gain harvesting and Roth conversions to further reduce their lifetime tax burden and keep their retirement income flowing smoothly.
As you approach retirement, tax planning becomes an even more important component of your financial strategy. Tax planning is an ongoing process that should adapt to changing tax legislation and your evolving financial needs, so I always encourage people to adopt a proactive approach.
Lastly, working with a qualified financial advisor who understands the nuances of retirement tax planning can make a huge difference in your financial outcome. At the end of the day, it’s not just about what you save, but also about how you draw from your accounts and coordinate income sources.
Creating tax-free income in retirement isn’t a myth—it’s achievable with the right planning and understanding tax rules.
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