In retirement planning, taxes often become the silent threat to long-term financial security. As tax rates rise, retirees who rely heavily on taxable income sources can find their plans strained faster than expected.
In this featured video, tax strategist David McKnight walks through what he considers the seven key sources of tax-free income in retirement, explaining why relying on just one or two strategies may not be enough in the years ahead.
His core idea is simple but powerful: retirees benefit from having multiple streams of income that don’t increase their tax burden, allowing them to stay in or near the 0% tax bracket whenever possible.
Video: In David’s Own Words
David McKnight’s Seven Sources of Tax-Free Income
In the video, David explains that each tax-free income source serves a different purpose. They aren’t interchangeable. Each one solves a unique planning challenge, and together they create flexibility in retirement.
Here’s how he describes them.
1. Roth IRA – Tax-Free Income with Liquidity
McKnight highlights the Roth IRA as unique because of its liquidity and flexibility. He points out that you can put money in and access it, and even replace it within certain rules. In retirement, qualified Roth withdrawals don’t add to taxable income, which helps retirees manage tax brackets year by year.
2. Roth 401(k) – Tax-Free Growth Plus “Free Money”
David emphasizes that the Roth 401(k) offers something none of the other strategies do: an employer match. He calls this “free money,” an immediate return that no other tax-free stream provides.
3. Roth Conversions – No Limits on How Much Can Be Moved
McKnight calls Roth conversions a workhorse strategy because there are no limits on how much can be converted in a given year. Conversions allow retirees to reposition assets from future taxable status into tax-free accounts, often during lower-income years, reducing future tax exposure and required minimum distributions.
4. Using the Standard Deduction to Offset IRA Withdrawals
Another strategy David highlights is keeping IRA and 401(k) balances low enough that required minimum distributions are equal to or less than the standard deduction. When done well, those withdrawals can be effectively tax-free. He calls this the “holy grail” of planning because money was deductible going in, grew tax-deferred, and then comes out tax-free.
5. Life Insurance Retirement Plans – Income Plus Long-Term Care Protection
McKnight discusses cash value life insurance strategies (often called a Life Insurance Retirement Plan). He notes that cash value can grow tax-free and can often be accessed tax-free. He also emphasizes a key reason many clients like this approach: the long-term care feature. Unlike traditional long-term care insurance, if long-term care is never needed, beneficiaries may still receive a death benefit.
6. Social Security That Remains Tax-Free
David stresses the importance of managing provisional income, which determines whether Social Security benefits are taxed. If provisional income is low enough, Social Security can remain partially or fully tax-free. He notes that tax-free Social Security helps address risks that are amplified by longevity, including sequence-of-return risk, inflation, and long-term care risk.
7. Reverse Mortgages – A Seventh Tax-Free Income Stream
Finally, McKnight introduces a seventh stream that many retirees overlook: using housing wealth through a reverse mortgage. He explains the concept by comparing two paths: spending down a pile of cash (that could otherwise grow and compound) while leaving home equity untouched, versus allowing investments to continue compounding while spending home equity.
He also notes that many heirs would rather inherit liquid assets than a home that must be sold.
Most importantly, reverse mortgage proceeds are loan advances, not income. As McKnight points out, that means reverse mortgage cash flow generally doesn’t affect IRMAA thresholds
A Broader Planning Conversation
The real takeaway from the discussion is not about any single product or tactic. It’s about looking at retirement income holistically and making sure every asset, including housing wealth, is considered thoughtfully.
Watch the full video below as David McKnight breaks down the seven sources and explains why housing wealth has become an important part of modern retirement planning.
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Contact David McKnight
David McKnight graduated from Brigham Young University with Honors in 1997. He has been featured in Forbes, USA Today, The New York Times, Fox Business, Bloomberg Radio, MarketWatch, CBS Radio, CNBC, Yahoo Finance, Nasdaq.com, Reuters, Investor’s Business Daily, Kiplinger’s and numerous other national publications. David’s bestselling book The Power of Zero has sold over 400,000 copies and the updated and revised version was published by Penguin Random House in 2018. This book was recently made into a full-length documentary film entitled The Power of Zero: The Tax Train Is Coming. When his follow-up book Tax-Free Income for Life launched in November of 2020, it finished the week as the #3 most-sold business book in the world. When his most recent book The Guru Gap launched in December of 2024, it finished the week at #8 on the USA Today Bestseller list and was the top-selling business book in the world. He and his wife Felice have seven children.
- www.DavidMcKnight.com
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The content of this blog is for financial advisors and professionals only and is not intended for consumer use. Names, cases, and scenarios are fictionalized for illustrative purposes. The opinions expressed here are those of the author alone and do not reflect the views of any affiliated entities or individuals. Don Graves, NMLS #142667.
