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10 Tax-Free Investments Retirees Should Consider

These moves can help lower your tax bill and protect your retirement income.

By Adam Palasciano

Edited by Chris Kissell

Updated Dec. 17, 2024

When you are no longer receiving a paycheck, reducing taxes becomes crucial to protecting retirement income. Retirees have specific financial goals, and minimizing tax obligations is one key to making money last longer.

Set yourself up for a stress-free retirement by considering one or more of these 10 tax-free investment options.

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Municipal bonds

Municipal bonds are one of the best tax-free investment options for retirees. Local governments issue these bonds, which are often exempt from federal income tax. In some cases, they’re exempt from state and local taxes as well.

This makes municipal bonds an excellent choice for retirees looking to generate income without increasing their tax burden. Plus, they are relatively low-risk, providing a steady stream of income.

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Roth IRAs

A Roth IRA is a powerful tool for growing investments tax-free. Unlike traditional IRAs, withdrawals from a Roth IRA are tax-free as long as the account has been open for at least five years and you are at least 59½ years old.

It’s worth noting that you cannot contribute to a Roth IRA unless you have earned income. So, you will need to do some work — even a part-time job — to use this option.

If you haven’t yet retired, consider contributing to a Roth IRA so you can tap the money tax-free once you finally stop working.

Roth 401(k) accounts

Similar to Roth IRAs, Roth 401(k) accounts allow you to withdraw funds tax-free in retirement. These accounts combine the benefits of tax-free growth and withdrawals with the higher contribution limits of a traditional 401(k).

As with a Roth IRA, you will not be able to make new contributions to a Roth 401(k) unless you are still working and earning income.

Get a free stock valued between $5 to $200

Secret: You don't need thousands of dollars to buy thousand-dollar stocks or create a diverse portfolio.

Robinhood offers a method of investing called “fractional shares.” On its own, one share of a single stock could cost a lot of money, making it difficult to diversify. Robinhood allows you to buy pieces of stock instead, so you have the option to build a diverse portfolio quickly.

Let’s say you want to invest $250, as an example.

With that amount, you could build a relatively diverse portfolio with an investment of $50 in a big tech stock, $50 in a retail stock, $50 in an energy stock, $50 in a manufacturing stock, and $50 in a bank.¹ This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice. To get stock reward, new customers need to sign up, get approved, and link their bank account. Stock rewards shares cannot be sold until 3 trading days after the reward is granted and the cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at <a href="https://robinhood.com/us/en/support/articles/open-account-pick-your-stock/">rbnhd.co/freestock</a>. Fractional shares are illiquid outside of Robinhood and are not transferable. Not all securities available through Robinhood are eligible for fractional share orders. For a complete explanation of conditions, restrictions and limitations associated with fractional shares, see the Fractional Shares section of our Customer Agreement. Robinhood Gold is offered through Robinhood Financial LLC and is a membership offering premium services available for a fee.

Even better news? Add a Robinhood Gold membership, and you’ll get access to 4.25% (as of 11/15/24) APY² Annual Percentage Yield. Rate valid as of April 12, 2024. To earn interest, a cash balance is needed. If you have a margin balance, there is no cash balance to earn interest. Interest rates for cash sweep and margin investing can change at any time. Fees may reduce interest earnings. on your uninvested cash³ Interest is earned on uninvested cash swept from your brokerage account to partner banks. Partner banks pay interest on your swept cash, minus any fees paid to Robinhood. As of Nov 15, 2023, the Annual Percentage Yield (APY) that you will receive is 1.5%, or 5% for Gold customers. The APY might change at any time at the partner banks' or Robinhood's discretion. Additionally, any fees Robinhood receives may vary and are subject to change. Neither Robinhood Financial LLC nor any of its affiliates are banks. All investments involve risk and loss of principal is possible. Robinhood Financial LLC (member SIPC), is a registered broker dealer. and the ability to buy and sell stocks 24 hours a day, 5 days a week.

Open and fund a Robinhood account and earn up to $200 in stock

Tax-exempt mutual funds

Investing in tax-exempt mutual funds is another way to reduce taxes during retirement. These funds typically invest in municipal bonds or other government securities that are exempt from federal taxes.

They provide retirees with a way to diversify their portfolio while keeping their tax liability to a minimum.

Health savings accounts

Health savings accounts (HSAs) offer a triple tax advantage for retirees with high-deductible health insurance plans (HDHP).

Contributions are tax-deductible. In addition, earnings grow tax-free, and you will not owe taxes on withdrawals you use to pay for qualified medical expenses.

As health care costs rise in retirement, an HSA can help cover those expenses without adding to your tax bill. If you have already been contributing to an HSA during your working years, it can be a valuable tax-free resource in retirement too.

Just note that once you enroll in Medicare — typically at age 65 — you are prohibited from making new contributions to your account.

Series I bonds

The earnings on Series I bonds generally are taxable. However, there is one major exception: Funds from these bonds that are used for some educational expenses escape taxation.

Even if you don’t use the bonds to fund an education, the interest earned on these bonds is exempt from state and local taxes. You also have the option of deferring federal taxes until you redeem the bond.

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Tax-exempt ETFs

Tax-exempt exchange-traded funds (ETFs) are similar to tax-exempt mutual funds. These ETFs focus on tax-exempt investments, such as municipal bonds, providing retirees with an easy way to invest in tax-free income sources.

529 plans (for grandkids going to college)

While 529 plans are typically used for educational expenses, they can still play a role in a retiree's tax strategy. If you're planning to help your grandchildren with their college expenses, contributing to a 529 plan can allow your contributions to grow tax-free.

Additionally, withdrawals for qualified educational expenses are tax-free. Contributing to a 529 can be a tax-advantaged way to provide more financial help to your grandchildren.

Indexed universal life insurance

Indexed universal life (IUL) insurance policies offer retirees a special tax advantage. While the premiums are not tax-deductible, the cash value of the policy grows tax-free.

Additionally, the death benefit is also tax-free to your beneficiaries. This type of policy can make sense for retirees looking for a tax-efficient way to leave a legacy for their heirs while also having access to tax-free cash during their lifetime.

Earn up to a $300 bonus and grow your money with up to 4.00% APY

This powerful combination checking + savings account from SoFi® allows you to earn up to a $300 bonus with direct deposit and grow your money with up to 4.00% APY.⁴ New and existing Checking and Savings members who have not previously enrolled in Direct Deposit with SoFi are eligible to earn a cash bonus of either $50 (with at least $1,000 total Direct Deposits received during the Direct Deposit Bonus Period) OR $300 (with at least $5,000 total Direct Deposits received during the Direct Deposit Bonus Period). Cash bonus will be based on the total amount of Direct Deposit. Direct Deposit Promotion begins on 12/7/2023 and will be available through 1/31/2026. Full terms at <a href="http://sofi.com/banking">sofi.com/banking</a>. SoFi Checking and Savings is offered through SoFi Bank, N.A., Member FDIC. SoFi members with Direct Deposit can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the 4.00% APY for savings (including Vaults). Members without Direct Deposit will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Interest rates are variable and subject to change at any time. These rates are current as of Dec. 3, 2024. There is no minimum balance requirement. Additional information can be found at <a href="http://www.sofi.com/legal/banking-rate-sheet">http://www.sofi.com/legal/banking-rate-sheet</a>

This is one of the top accounts we’ve seen, and offers like this can be rare. You work hard, and now it’s time to make your money work for you — with SoFi, you can grow your money with hardly any effort!

SoFi has no account or overdraft fees⁵ Overdraft Coverage is limited to $50 on debit card purchases only and is an account benefit available to customers with direct deposits of $1,000 or more during the current 30-day Evaluation Period as determined by SoFi Bank, N.A. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Members with a prior history of non-repayment of negative balances are ineligible for Overdraft Coverage. and additional FDIC insurance up to $2 million on deposits is available through a seamless network of participating banks.⁶ We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at <a href="http://sofi.com/legal/banking-fees/">sofi.com/legal/banking-fees/</a> ⁷ SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at <a href="http://sofi.com/banking/fdic/terms">SoFi.com/banking/fdic/terms</a> See list of participating banks at <a href="http://sofi.com/banking/fdic/receivingbanks">SoFi.com/banking/fdic/receivingbanks</a> Plus, you can receive your paycheck up to 2 days early.⁸ Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

How to earn up to $300: Sign up and make a direct deposit within the first 25 calendar days of the promotional period, then collect a $300 cash bonus with a direct deposit of $5,000 or more.

SoFi is a Member, FDIC. ⁷ SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at <a href="http://sofi.com/banking/fdic/terms">SoFi.com/banking/fdic/terms</a> See list of participating banks at <a href="http://sofi.com/banking/fdic/receivingbanks">SoFi.com/banking/fdic/receivingbanks</a>

Open your SoFi account and set up direct deposit

Other types of life insurance

While you won’t benefit directly from tax-free income with a traditional life insurance policy, your heirs will.

The death benefit from a life insurance policy is typically tax-free, allowing you to provide for loved ones without worrying about taxes reducing their inheritance. This can be a crucial part of your estate-planning strategy, ensuring your wealth is passed on efficiently.

Bottom line

Finding tax-free investment options can be helpful to preserving your savings during retirement.The tax-free options on this list help retirees supplement their retirement income and minimize their tax burden.

Consider adding some of these investments to your retirement plan to set yourself up for a more secure and financially sound future.

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