7 Tax Free Investment Options For Seniors -Choosing Your Best Investment

Tax free investments

If there’s one thing in life that’s certain, it is death and taxes. Paying more attention to the latter, taxes can be annoying, nobody enjoys paying them. Today you will learn that there are several opportunities where you can actually earn income without getting taxed mainly through investment.

Seniors should consider tax free investment options that can make a hefty return. Unfortunately, many seniors are unaware of these options and instead choose to place their funds in a low-interest savings account. This is no way to grow your money.Choose a certain type of investment account, and you could earn more than 10% on your investments. One of the main reasons seniors fail to make the best investments is because they have never received proper financial education.

These investments can be planned and banked by the young and seniors alike. The bright side about tax-free income for seniors is that you get to put in money that won’t have to undergo more taxing in the long run. Below are several investment options for you. See what works best for you.

Traditional IRA/Roth IRA

A Roth IRA is an individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax-deductible, and qualified distributions are tax-free.

Unfortunately, your input money will be taxed when you make the deposit, but it gets the opportunity to grow without being taxed. The most important part is that you also get to finally withdraw it tax-free.

How Much Can I Put in my Roth IRA Monthly

A traditional IRA is a retirement account in which people can invest up to $6,000 per year ($7,000 if age 50 or older). Contributions may be tax-deductible depending on the taxpayer’s income, tax-filing status and other factors. Withdrawals from traditional IRAs after age 59½ are taxed as ordinary income and, if taken before that age, may be subject to a 10% IRS penalty.

How Does Traditional IRA/Roth IRA Work?

A Traditional IRA allows your money to grow tax-deferred until you withdraw it in retirement, hence being a tax free investment. This means that you do not pay taxes on the earnings within your account as they accumulate each year; rather, you pay taxes when you withdraw the funds during your retirement years.

You may also be able to deduct your contributions from your taxable income each year, reducing your current tax bill.

A Doable Investment Plan

This investment plan is doable, but you’ll be required to accumulate up to more than $5500 annually in order to achieve your financial plans. Just like many other investments, you will be limited based on your marital status, as well as your earnings.

If you’re single, you can only contribute if you earn $135,000 or less each year. Married couples qualify if they earn a combination of up to $189,000 every year. The Roth IRA is one of the most recommended investment plans. You can accumulate up to $3.25 million dollars, if you began at the age of 22 and earned 10% interest until the age of 65. This figure could favorably increase to $5.25 million if you went on up to the age of 70. This is just the beauty of tax-free compound interest.

Roth 401 (k) or Roth 403 (b)

A 401 (k) plan is an employee-sponsored retirement plan that allows workers to save and invest a portion of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account. A 403(b) plan is available to employees of public schools and certain nonprofit organizations; these plans offer similar features as those found in 401(k) plans.

How Does It Work?

If your employer offers this type of retirement plan, you will need to decide how much of your paycheck you want to contribute. You may also be able to allocate your contributions among a selection of investment funds (e.g., stock or bond mutual funds).

You can change the amount and allocation of your contributions over time, but you may be limited in the number of times you can do so each year. Your employer may match some portion of your contributions, which is essentially free money for your retirement account.

Is It Better to Invest in a Roth IRA or a 401 k

The answer is that it will depend on your specific circumstances. For example, if you are currently a high earner and expect to be in a lower tax bracket upon retirement, then saving in a 401k might be a better option. However, if you are in a low tax bracket now and expect to be earning more later, then the Roth IRA is likely a better choice.

You must also consider the fact that 403b plans are simply 401ks for school districts, non-profits and some government agencies. These are also pre-tax retirement plans that allow for tax-deferred savings until later years when you will presumably be in a lower tax bracket.

Municipal Bonds

Municipals are fixed-income investments that pay a stated interest rate over a specified period of time and return the principal at maturity. Although they may look similar to corporate bonds, they are not issued by corporations. Instead, they are issued by states and municipalities in order to finance public projects such as roads, schools and hospitals.

In order to entice investors, these bonds offer tax-free interest income therefore this is a tax free investment. As a result, you save money on both income taxes and capital gains taxes when compared with corporate bonds.

Municipal bond funds also have tax advantages because the fund itself does not pay taxes on its earnings; moreover, this can increase your after-tax yield even more when compared with taxable corporate bond funds.

Health Savings Account (HSA)

A Health Savings Account, or HSA, is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit thus being tax free investment.

Unlike a flexible spending account (FSA), funds roll over and accumulate year to year if they are not spent. HSAs are owned by the individual, with no “use it or lose it” rule. Funds contributed belong to the employee even if employment ends.

Distributions may be used to pay qualified medical expenses at any time without federal tax liability or penalty. Unqualified withdrawals may be taxed and incur a 10% penalty. Withdrawals for qualified expenses are exempt from federal income tax and most state taxes.

How Does Health Savings Account (HSA) work?

Like other retirement plans, it allows you to contribute up to $3,650 per year if you have an individual coverage plan and $7,300 per year if you have a family coverage plan. The maximum contribution limit applies even if both spouses have HSAs and are covered by family plans. If the contributor is 55 years old and above, he/she can contribute an additional amount of $1,000 as a catch-up contribution.

Tax-free Exchange Traded Funds (ETF)

Exchange-traded funds (ETFs) are a type of investment fund that holds assets such as stocks, commodities or bonds. ETFs trade like shares on a stock exchange and are priced continuously throughout the day instead of just once at the end of the day.

Most ETFs track an index such as a stock index or bond index, but some of them hold actively managed portfolios of securities chosen by human portfolio managers rather than computer models. The main feature that distinguishes ETFs from other types of funds is that they trade on an exchange—just like a stock.

How Do Tax-Free ETFs Work?

Tax-free Exchange Traded Funds or ETFs invest in municipal bonds, which are debt securities issued by states and local governments to fund their projects. These bonds offer high returns but minimal risk because they’re backed by the government.

Mutual Funds

Mutual funds are a convenient way to diversify your portfolio and not have to learn about investing yourself. They can be bought from a broker or from the fund company directly, and they’re available in both traditional and Roth versions. If you want to invest in mutual funds but don’t want to pay taxes on them, there are lots of tax-free mutual funds out there.

Which Mutual Funds Are Tax Free?

Mutual funds typically pay out capital gains distributions at the end of the year from the profits they made on their stock sales throughout the year. These distributions are taxable, whether or not you actually received cash from the fund that year. If you buy a tax-free mutual fund, however, there is no capital gains distribution paid because the fund sells its stocks without making a profit.

Another investment option you may not have heard about is the 529 Education Fund which offers tax benefits in relation to a child’s education.

529 Education Fund

A 529 plan named after Section 529 of the Internal Revenue Code is an investment vehicle that offers certain tax benefits when used to save for your child’s college education. Each state has at least one plan available to residents, and you may join any plan offered by any state.

Contributions to 529 plans made by residents of some states are eligible for a state income tax deduction or credit; however, whether your contributions are deductible from federal taxes depends on the state in which your plan is located, so be sure to check with your financial adviser about the benefits of each plan before investing.

How Does 529 Education Fund Work?

To start investing, you simply open an account with an investment company that offers the plan and choose how your money will be invested. Most plans offer a range of investment options, including mutual funds and age-based portfolios that automatically become more conservative as the beneficiary nears college age.

You name a beneficiary when you open the account — typically the student, but it can also be yourself if saving for your own education — who will use the money for qualified higher education expenses. You can change beneficiaries at any time, but only for members of the same family (defined as stepchildren, grandchildren and siblings).

Which Is the Best Tax Free Investment

Overall, if you can only choose one of these tax-free investments, the traditional IRA is your best option. It provides a broader range of investment options than a Roth IRA. This can be important to take advantage of market trends, such as a weak dollar.

If you would prefer to keep accessing your money without having to pay taxes on it now or in retirement, the Roth IRA might make more sense for you. A tax free investment is one in which any capital gains or dividends are not taxed when received.

Investment options for seniors should accommodate the complex needs of their particular situation. Seniors can be a little more at ease in their investing when they know the money they put away will not be taxed on any hopefully large gains.

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