6 Types Of Tax-Free Retirement Income Streams You Should Take Advantage Of

tax free retirement income

No one wants to have to worry about running out of money in retirement. The moment you call it quits from the workforce, you want to live a mostly stress-free life. And hopefully you invested in income generating assets so you can have reliable income every month. But even if you did do that, finding ways to take advantages of tax breaks in retirement will help your money stretch longer.

In most instances, we eventually have to pay taxes on our investments. Yearly dividend payments held in a normal brokerage account are taxed. Growth stocks that you sell in order to live are the same. Even your quarterly distributions from real estate crowdfunding holdings are taxed as income. But when you’re retired, you probably want to avoid paying taxes on all or some of your income. After all, if you and your spouse need $100,000 per year to live, you definitely don’t want it all to come from taxable income.

Why is that? As you can see below, by only having $80,000 of your $100,000 as taxable income, you will save a lot of money on your federal income taxes.

Tax Brackets and Rates, 2021
RateFor Unmarried IndividualsFor Married Individuals Filing Joint ReturnsMarried filing separatelyFor Heads of Households
10%$0 to $9,950$0 to $19,900$0 to $9,950$0 to $14,200
12%$9,951 to $40,525$19,901 to $81,050$9,951 to $40,525$14,201 to $54,200
22%$40,526 to $86,375$81,051 to $172,750$40,526 to $86,375$54,201 to $86,350
24%$86,376 to $164,925$172,751 to $329,850$86,376 to $164,925$86,351 to $164,900
32%$164,926 to $209,425$329,851 to $418,850$164,926 to $209,425$164,901 to $209,400
35%$209,426 to $523,600$418,851 to $628,300$209,426 to $314,150$209,401 to $523,600
37%$523,601 or more$628,301 or more$314,151 or more$523,601 or more

What Types Of Tax-Free Retirement Income Streams Exit?

Social Security Payments

Ah yes, social security. Old faithful! (Kidding).

To be clear, you could be taxed on your Social Security benefits if your income exceeds a certain amount.

If Social Security income combined with cash investments and pension benefits exceeds the “combined” maximum allowed by Social Security tax laws, you will have to pay taxes on this income. As with income taxes, the combined maximum depends on how you file your tax return. You can learn more about the combined maximum thresholds on the Social Security Administration’s website.

Roth IRA Distributions

Roth IRAs are the mother of all tax-free retirement income streams. In a Roth IRA, your money grows tax free for years and when you begin distributions they don’t count as income as long as withdrawals are considered qualified. However, if you decided to take a non-qualified distribution (if your money hasn’t been in the Roth IRA for 5 years), any earnings on your principal would then count as taxable income.

If you’re thinking about investing in a Roth IRA, you will need to make sure you meet the income eligibility requirements. Check out the income thresholds on the IRS website.

Health Savings Accounts

Health Savings Accounts (HSA) are a great way to avoid paying more federal income taxes in retirement. On a federal level, contributions to HSAs are not subject to income taxes (they might be subject on a state by state level).

Earnings to an Health Savings Accounts from interest and investments are also tax-free. Distributions from an HSA are tax-free so long as they are used to pay for qualified medical expenses.

Reverse Mortgage Payments

tax-free retirement income streams

The IRS looks at reverse mortgage payments as a loan, not income. That means that reverse mortgage payments are not taxable.

Reverse mortgages might seem like the last resort for retirees –and for some they are — but according to Housing Wire, that is far from the truth. In fact, a lot of retirees are using reverse mortgages to their financial advantage.

The idea is to use the credit line as a safety net in the event funds are needed but your stock portfolio or other assets are down. This way, borrowers can allow their assets to rebound, using the reverse mortgage proceeds instead to cover expenses.


Tax-Exempt Municipal Bond Interest

Municipal bonds (AKA “munis”) are fixed-income investments. The interest paid on municipal bonds is not only exempt from federal taxes, but they can be exempt from state and local taxes as well.

If you’re looking for steady, reliable, tax free income in retirement, there are a number of Municipal Bond ETFs –like VTEB – Vanguard Tax-Exempt Bond ETF — that might be right for you.

Profits From Selling Your House

Do you have to pay capital gains tax on the sale of a house? Maybe yes, maybe no.

If you’re selling a second home or investment property, and you have held that property for more than a year, you will be subject to a 15% capital gains tax.

However, if you sell your primary residence, you can avoid paying a lot of taxes. In fact, you may not have to pay any tax at all if the capital gain is small enough.

Thanks to the Taxpayer Relief Act of 1997, you get a large tax break if you have lived in the home as your primary residence in two of the last five years. And, any renovations, improvements or additions that have been done on the home can also reduce the amount of taxes you’ll pay.

So just how much capital gains taxes can you avoid on the sale of your primary residence? Quite a bit. Without even considering the deductions of renovations and improvements, single filers are exempt from capital gains taxes on the first $250,000 of gains on the sale of a house. For married couples filing jointly, the first $500,000 of gains are exempt.


There are plenty of ways to avoid paying excessive taxes in retirement. You just need to have a plan and also start early. Investing in a Roth IRA in your 20s will pay off big time when you hit retirement.

C. James

C. James is the managing editor at Wealth Gang. He has a degree in finance and a passion for creating passive income streams and wealth management.