Tax-Free Dividends in Retirement

 I'm not a tax adviser. I hear things, read up on them, and apply them to my situation. I hope this can help some people out. Do your own research or get professional help.

Many people have standard 401k accounts. It's great as it gives you a tax break now (more money to invest!), but you'll pay taxes when retire and start withdrawing. The idea is that your income is lower during retirement, and hence you'll be in a lower tax bracket. Sounds great. But have what will your income be in retirement. A disciplined dividend growth investor may end up with a sizable portfolio and passive income.

From: http://www.tax-brackets.org/federaltaxtable

Tax Bracket (Single)	Tax Bracket (Married)	Tax Bracket (Head of Household)	Marginal Tax Rate
$0+	$0+	$0+	10%
$9,225+	$18,450+	$13,150+	15%
$37,450+	$74,900+	$50,200+	25%
$90,750+	$151,200+	$129,600+	28%
$189,300+	$230,450+	$209,850+	33%
$411,500+	$411,500+	$411,500+	35%
$413,200+	$464,850+	$439,000+	39.6%

If you're building up a passive income portfolio for several decades, it's not that difficult to end up earning between 9k and 37k a year in dividends. So you have your dividend income, probably taxed at the dividend rate, currently 15%.  Then you have your 401k income, and any other pension, which I believe is taxed at the normal income tax rate per the table above.

The other thing is deductions. When you're working and you have a mortgage, you have some nice deductions to offset your income. When you're retired and possibly paid off your house, you no longer have many deductions.

So look into hedging on the tax rates, as they are extremely low in the US compared to other nations, and with the deficit as it is, there's a chance taxes will rise over the next decade or so. Regardless of which party runs the government. To hedge on tax rates, think about some ways to earn income tax free. Roth accounts like Roth IRA or Roth 401k are good vehicles. In those accounts, seek out the dividend paying funds or individual stocks if you have the option. If your passive income portfolio brings in 20k, 2.5k could be lost to taxes right away, or more if taxes increase. With tax free income, you pay taxes now, but all proceeds come out tax free, including dividends.  Check it out!