Key Points
Taxes can reduce the take-home pay of retirees.
Seniors don't have to pay taxes on some sources of income.
A Roth IRA is a tax-free income source, but retirees need to be careful about Roth conversions.
- The $23,760 Social Security bonus most retirees completely overlook ›
Most retirees have lots of things to spend money on. Taxes are probably not at the top of any senior's preferred list of what to do with their funds. Unfortunately, if you don't plan ahead, you could lose some of your hard-earned retirement income to the IRS.
The good news is, there are tax-free income sources that leave more of your money to you to use since the government doesn't take a cut. Here's one of them.
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »
Image source: Getty Images.
This is an excellent tax-free income source for retirees who planned ahead
A Roth IRA is one of the best sources of tax-free income for seniors. Roth IRAs are an alternative to traditional IRA accounts because they allow you to defer your tax breaks until you retire.
Unlike with most other retirement plans, you don't get to deduct your Roth IRA contributions when you're working and investing. You contribute with after-tax dollars.
However, if you follow all the rules, when you become a retiree (or at least age 59 1/2), you can withdraw as much money as you want from your IRA tax-free. This is a huge benefit, especially since you already enjoyed tax-free growth on the money you put in.
Your Roth IRA distributions also don't count in your income determination when assessing whether Social Security is taxable, so investing in a Roth could mean Social Security stretches further as well.
Don't rush into a Roth conversion
If you're nearing retirement and the idea of tax-free income sounds attractive, you may be tempted to try to convert your traditional IRA to a Roth.
Don't rush into this, though. There are tax consequences and limits on when converted funds can be withdrawn, so be careful about understanding all the details before you decide this route is the way to go.
You can avoid the hassle and potential costs of a Roth conversion, though, if you just choose a Roth IRA from the start when you're working and saving for your future.
The $23,760 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies.
View the "Social Security secrets" »
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
