2601 Main Street
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Irvine, CA 92614
(949) 221-8105 ext 2128
michael.loo@lpl.com

Mike Loo, MBA

Vice President of Investments


What Are My Options For Tax-Free Income For Retirement?

| February 23, 2017
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With the tax filing deadline rapidly approaching and the possibility of owing additional money for last year’s taxes, many people may find themselves wondering, “Is there a way for me to pay less in taxes?” While your tax professional is your go-to person for this short-term pain, tax-free income for retirement could be a solution for your long-term problem. Your financial advisor can help you determine the best route to take for tax-free income, but a Roth IRA, a Roth 401(k), or permanent life insurance are great options to investigate first.

Roth IRA

So, what is a Roth IRA? A Roth IRA is a retirement savings account that you can contribute to using after-tax dollars. When you reach retirement age and need to withdraw funds, you won’t be hit with taxes on the money you’ve put away. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Depending on which vehicles you are utilizing for retirement savings, this may be one of your few options for tax-free income. For example, if your employer doesn’t offer a Roth 401k, or perhaps doesn’t offer any work-sponsored plan at all, this could be one of your few available options for tax-free income for retirement.

But, there are income limitations that determine if you are allowed to contribute to this type of account. If you are single, and your adjusted gross income (AGI) is more than $133,000 you are not eligible to contribute to a Roth IRA, but if you are married and filing jointly, your AGI must be lower than $196,000 in order to contribute. If your AGI is under $118,000 as a single person or $186,000 as a married couple, you can contribute a maximum amount of $5,500 a year, or $6,500 if you are over 50, thanks to the catch-up provision. This provision allows you to contribute an additional $1,000 a year in order to ‘catch-up’ if you’ve put off saving for retirement.

Roth 401(k)

In addition to a Roth IRA, a Roth 401(k) is another option to explore. A Roth 401(k) is similar to a traditional 401(k), except you contribute to one using after-tax dollars instead of pre-tax. Roth IRA’s and Roth 401(k)’s are similar in that regard. Unlike the Roth IRA, contributions to a Roth 401(k) are not subject to income limitations, so if you are a high income earner, you can still contribute after tax money into your account.

A Roth 401(k) allows you to contribute a lot more money than a Roth IRA towards an account where the money can grow tax-free—$18,000 versus $5,500 for those under 50. Depending on your AGI, you may not be eligible to contribute to a Roth IRA, so your Roth 401(k) would be your other investment option for tax-free retirement income.

While a work-sponsored Roth 401(k) is a great option, don’t forget to consider a Roth IRA because the Roth IRA will have more investment choices available to you. A Roth 401(k) is limited to what the plan offers, whereas a Roth IRA is not. If you are utilizing some of the other tax-free income savings vehicles, contributing to a Roth IRA will create additional tax-free money available to you in retirement.

Permanent Life Insurance

In addition to Roth IRA’s and Roth 401(k)’s, you can utilize a permanent life insurance policy as a source of tax-free income in retirement. Permanent life insurance is a life insurance policy that builds cash value. Permanent life insurance could play a dual role in your strategy with an emphasis on insurance in your early years and potential tax-free income in your retirement years.

Chances are if you have a family, or are financially responsible for a parent, you will need life insurance anyway. While term may be an inexpensive option for the short run, some people may prefer to pay more upfront for a permanent policy so that they are not limited to having coverage for a set term of time. Depending on the type of permanent insurance you buy, some products have the potential to provide income for life after you reach a certain age. Additionally unlike a Roth IRA and Roth 401(k), it has the potential to provide you with tax-free income prior to age 59½ if you fund it properly.

How I Can Help

With multiple retirement savings vehicles to choose from, deciding on which combination will work best for you can be tough. Exploring your options with a financial advisor will allow you to get answers to your questions and figure out a plan to help you work towards your goals. Call my office today to set up a meeting at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com and we can explore your options together.

About Mike Loo


Mike Loo is an independent financial advisor with more than 20 years of experience in the financial services industry. His mission is to provide a meaningful impact on the lives of clients and the people they care most about, help them make educated decisions with their money, and build a strong financial foundation for both themselves and their next generation. Mike is committed to meeting a high standard of excellence, taking the time to listen to clients’ needs, and designing strategies that aim to help clients save money and reduce debt. He seeks to fit a client’s investments into their life and educate them so they’ll understand their investments. To learn more about how Mike may be able to help, connect with him on LinkedIn, call his office at (949) 221-8105 x 2128, or email him at michael.loo@lpl.com.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Trilogy Capital, a registered investment advisor. Trilogy Capital and Trilogy Financial are separate entities from LPL Financial.

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