Retirement Retired Life

13 Easy Ways To Increase Your Tax-Free Income in Retirement

From smart investments to creative savings, here's how to boost your income tax-free.

By Stacy Garrels

Edited by Laura Ratliff

Updated March 20, 2025

When people think about retirement planning, they worry about setting aside enough money and hope they won't outlive their funds.

Fewer people think about the impact that taxes will have on their money, yet planning a tax-efficient strategy is crucial to keeping as much money as possible in your pocketbook.

Here are 13 simple ways to increase your tax-free income in retirement.

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Early and consistent saving

Start saving early. Compound interest sets you up for better long-term growth. It takes around nine years for investments to double, and the longer your investments can marinate, the better.

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Diversify investments

Spread your funds across various accounts, such as traditional IRAs, Roth IRAs, and employer-sponsored plans. This can reduce your tax burden, diversify risk, and offer more flexibility when withdrawing funds in retirement.

Utilize employer-sponsored plans

Maximize your contributions to employer-sponsored plans — especially if there is a company match. This added "free money" can significantly boost your retirement savings.

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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cannot be sold until 3 trading days after the reward is granted and the cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed.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 4.00% (as of 12/27/24) 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.

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Roth IRAs and tax-free withdrawals

Invest in Roth IRAs, as these accounts are funded with after-tax dollars, and contributions grow tax-free. Then, when you withdraw funds during retirement, you'll pay no taxes as they were already paid upfront with your after-tax dollars.

This can be highly advantageous to managing your taxable income during your non-working years.

Roth conversions

Converting a traditional IRA (funded with pre-tax dollars) to a Roth IRA is another option for securing tax-free income during retirement. However, you must pay taxes upfront when you make the conversion. Talk to a financial planner to see if this strategy suits you.

Strategic withdrawals

Be strategic with how you withdraw your retirement funds. Work with an advisor to plan the sequence of withdrawals — from across different accounts — in the most tax-advantaged way possible.

For example, many retirees tap into their Roth IRAs before their traditional IRAs to reduce their immediate tax burden.

Grow Your $$: 11 brilliant ways to build wealth after 40

HSA funds

Funds from your health savings account (HSA) offer a triple tax benefit. Contributions are tax-deductible, growth is tax-free, and qualified medical withdrawals are tax-free.

Additionally, after age 65, you can withdraw funds from your HSA without a tax penalty. You will, however, have to pay income taxes on HSA distributions unless the funds go to qualifying medical expenses.

Reverse mortgages

For qualifying homeowners, a reverse mortgage can provide tax-free income without selling their homes. However, these loans come with fees and interest that could ultimately impact their estates.

Indexed universal life insurance (IUL)

These policies can accumulate significant cash value over the years with the funds growing tax-free. At any age, you can take out a tax-free loan from the policy, and any remaining funds will provide after-death benefits to your beneficiaries.

Earn up to a $300 bonus and grow your money with up to 3.80% 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 3.80% 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. See full bonus and annual percentage yield (APY) terms at <a href="http://www.sofi.com/banking#1">sofi.com/banking#1</a>. SoFi Checking and Savings is offered through SoFi Bank, N.A., Member FDIC. SoFi members who enroll in SoFi Plus with Direct Deposit or by paying the SoFi Plus Subscription Fee every 30 days or with $5,000 or more in Qualifying Deposits during the 30-Day Evaluation Period can earn 3.80% 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 stated interest rate. Members without either SoFi Plus or Qualifying Deposits, during the 30-Day Evaluation Period will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Only SoFi Plus members are eligible for other SoFi Plus benefits. Interest rates are variable and subject to change at any time. These rates are current as of Jan. 24, 2025. 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>. See the SoFi Plus Terms and Conditions at <a href="https://www.sofi.com/terms-of-use/#plus">https://www.sofi.com/terms-of-use/#plus</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 fees⁵ 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> or overdraft fees⁶ 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 $3 million on deposits is available through a seamless network of participating banks.⁷ SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor 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 $3M through participation in the program. See full terms at <a href="http://sofi.com/banking/fdic/sidpterms">SoFi.com/banking/fdic/sidpterms</a>. See list of participating banks at <a href="http://sofi.com/banking/fdic/participatingbanks">SoFi.com/banking/fdic/participatingbanks</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 depositor 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 $3M through participation in the program. See full terms at <a href="http://sofi.com/banking/fdic/sidpterms">SoFi.com/banking/fdic/sidpterms</a>. See list of participating banks at <a href="http://sofi.com/banking/fdic/participatingbanks">SoFi.com/banking/fdic/participatingbanks</a>.

Open your SoFi account and set up direct deposit

Municipal bonds

Municipal bonds are another popular, tax-free investment option. By lending money to local governments, you earn interest, and this income is generally exempt from federal taxes. In some instances, this income is also exempt from state and local income taxes.

Monitor tax laws

Tax laws are constantly changing. Staying informed can help you make the adjustments you need to optimize your financial retirement strategies and minimize your tax burden. Check in regularly with your financial advisor to keep up-to-date.

Tax-friendly states

Consider retiring to a more tax-friendly state. Some states, such as Florida and Tennessee, don't tax retirement income.

Supercharge your investments: See what could happen if you add fine art to your investment portfolio

Laddered bonds and annuities

Laddered bonds and tax-deferred annuities can provide added tax-advantaged security during retirement.

With laddered bonds, you can defer taxes on capital gains until you sell the bonds. By staggering their maturity dates, you avoid having everything mature all at once and can spread out the income over multiple years in a more manageable way.

Tax-deferred annuities let your investment grow tax-free until you withdraw, allowing for compounded growth and flexible income timing. You can take distributions during lower-income years that won't bump you into a higher tax bracket.

Bottom line

Retirement is about enjoying the rewards of decades of hard work, and having a stream of tax-free income makes it easier.

Some upfront planning now can maximize your retirement savings and keep more money in your pocket later, allowing you to live out some of your bucket-list dreams, such as traveling, going on a cruise, or learning a foreign language.

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