By Allison Alexander
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Is the number one financial resolution for the year 2025.
Withdrawing from an IRA, individual account, joint account, or trust account might temporarily resolve your financial issues, but it can also boost your taxable income, resulting in a higher tax obligation. Depending on your circumstances, you might want to consider some other potential alternatives that could be tax-free, including the following:
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Using Your Health Savings Account as a Safety Net
You can finance a health savings account (HSA) when you enroll in a high-deductible health insurance plan. The money you put into an HSA can be deducted from your taxes, and the money it earns over time grows without being taxed. Additionally, the funds from an HSA can be withdrawn tax-free for medical expenses that meet certain requirements.
People who don’t use medical expenses out of their Health Savings Account (HSA) allow the account balance to grow tax-free. If you have carefully kept track of your qualified medical expenses, you can pay back yourself even after the expense was incurred, as long as you have the right documentation. A payment from your HSA remains tax-free if you have the correct proof.
Using Your Traditional IRA to Tap into a Source of Tax-Free Withdrawals
You can withdraw money from your Individual Retirement Account (IRA) without getting taxed on it, as long as you put the funds back into your IRA within 60 calendar days. For instance, if you need a down payment for a house purchase before selling your current house, you could take a short-term withdrawal from your IRA. After you sell your old house within 60 days, you can return the funds to your IRA and dodge taxes on the withdrawal.
If the sale of the home doesn’t come through on time, alternative options may be available to cover the cost of the distribution. For example, a spouse or friend could take a withdrawal from their Individual Retirement Account (IRA) to replace the original withdrawal. However, it’s worth noting that each taxpayer is only allowed one IRA rollover every 12 months. If the funds are not replaced within the designated 60-day timeframe, they will be subject to taxes and, if the IRA owner is under 59 1/2 years old, an additional 10% penalty will be incurred. Another possibility is soliciting help from family members to borrow funds to replace the distribution, with the understanding that repayment will be made once the home is sold. Nonetheless, it’s essential to carefully consider the potential risks associated with using IRA distributions to cover short-term financial needs.
3. Leveraging Margin Accounts for Tax-Free Income
If you have a taxable investment account, you can be lent up to half its value and use the funds for any purpose using a margin loan. The account acts as collateral for the loan, and you don’t have to make regular payments by a certain date.
Existing margin loans can be beneficial due to their flexibility. However, they carry potential risks. A primary concern is that the interest rates charged on these loans are frequently higher than those offered by ordinary banks and may change as time passes. Furthermore, you may receive a margin call if the value of your investment account drops below the amount needed for the minimum margin requirements. In this instance, you have two choices: depositing additional funds or selling some securities in the account to maintain the necessary margin level. Unfortunately, it’s often disadvantageous to sell your assets during a market downturn.
In spite of the potential risks, margin loans offer some significant advantages. The application and administrative process for margin loans is usually uncomplicated, making them readily available to those who need them. What’s more, dividends, interest and deposits paid into the account can also contribute to reducing the loan balance over time. This characteristic, coupled with the ability to access cash without incurring taxes, makes margin loans an appealing choice for addressing short-term liquidity issues.
A type of revolving line of credit that uses the equity in your home as collateral to secure the loan. In other words, a Home Equity Line of Credit (HELOC) is a type of loan that allows you to borrow money based on the value of your home, and you’ll only have to pay interest on the amount you draw.
Tapping into a home equity line of credit (HELOC) can serve as a financial safety net, even if you don’t have an immediate need. While a HELOC can provide a lump sum for a variety of purposes, such as renovating or consolidating debt, there are potential risks to consider. With a HELOC, the interest rate can fluctuate, making it difficult to budget. Taking out too much home equity can put you in a vulnerable position if property values drop. Additionally, using a HELOC can be costly, as there are often upfront fees associated with application and appraisal costs. After carefully weighing the pros and cons of your financial situation, a HELOC can be a viable solution for accessing funds quickly.
5. Out-of-date Life Insurance Policies with Cash Value
Q: What do I need to know about my cash-value life insurance policy?
A: I can help you understand how cash-value policies work. These policies combine a death benefit with a cash savings element that grows over time. The cash value is usually based on premiums paid over time, and it can be accessed through a loan or withdrawals, but it may reduce your policy’s death benefit or interest payments.
Older life insurance policies with a built-in cash value can be a source of tax-free funds. Instead of surrendering the policy and facing potential tax penalties, you may choose to replace it with a new policy that maintains the death benefit and allows you to utilize the cash value for tax-free expenditures. Please be aware that if the policy expires before the policyholder passes away, any outstanding loans will be considered taxable income. Further, upon the policyholder’s passing, the beneficiary will receive the death benefit minus any cumulative withdrawals made.
6. Municipal Debt Securities (Municipal Bonds)
In the US, income from these bonds is usually tax-free at the federal level and, in some cases, at the state and local level if you live in the state where the bonds are issued. This tax-free income is a big draw for investors looking for stable cash flows. While muni bonds generally have lower interest rates than taxable bonds, their tax exemption can end up earning investors a higher return, especially those in higher tax brackets. Still, it’s crucial to assess the creditworthiness of the issuer and understand the potential risks involved.
7. Strategic Liquidation of Investments
“Strategic liquidation of investments is the process of selling assets at the optimal time to maximize returns while ensuring alignment with your financial goals and risk tolerance.”
“Considerations for Strategic Liquidation of Investments:
Reasons for liquidation
Tax implications
Market conditions
Financial goals
Risk appetite
Employment status
Non-urgent reasons
When selling investments, the first portion of the proceeds that goes back to the original amount invested is exempt from taxes. Even if an investment sale results in a gain, losses in other areas can be balanced against gains, if timed correctly during market downturns. If you decide to cash out investments from a taxable account, prioritize those held for over a year to receive long-term capital gains treatment. Investments classified as long term are taxed at more favorable rates, potentially making this approach more tax efficient.
8. Gifts
Gifts can be a valuable source of untaxable income, as long as they comply with the Internal Revenue Service (IRS) rules. The IRS allows people to give a particular amount each year to several recipients without having to pay any gift tax and without affecting their lifetime exemption from estate and gift taxes. For the year 2025, this yearly limit is set at $19,000 per person.
- Gifts from individuals: As of 2025, one person is allowed to give up to $19,000 to anyone they wish without needing to file a gift tax return.
- Joint gifts from couples: Spouses can combine their exclusions, allowing a married couple to give up to $38,000 per recipient in 2025 without paying a gift tax.
Individuals who donate exceptionally large gifts to educational institutions and medical providers can make payments on behalf of others, surpassing the annual limit allowed by the IRS, while still remaining eligible.
9. Proceeds from the Sale of Goods
This section focuses on calculating profits and losses related to the sale of goods and merchandise by a business. It includes guidance on accounting treatments for initial margins, overall margins, and built-in costs, in addition to discussing expenses such as certain taxes, insurance, and reserving provisions.
In most cases, you don’t have to pay taxes if you sell used items for less than what you paid for them originally. If you sell things like furniture, clothes, or electronics, you won’t owe taxes. However, if you sell items through platforms like Facebook Marketplace or eBay, and you make over $600 in a single year, you will likely receive a Form 1099 to report your income for tax purposes. If your income is more than $600, you will need to report your net profit, even if you don’t get a 1099 form showing your total earnings.
10. Roth IRAs
Considering tapping into a Roth Individual Retirement Account (IRA) should usually be a last resort because of the advantages of letting it grow tax-free over time, it still offers the benefit of providing a source of tax-free cash flow. Contributions are made with money that’s already been taxed, and when you withdraw the money, including the earnings, you won’t owe federal income taxes. To qualify for tax-free withdrawals, your account must have been open for at least five years and you must be at least 59½ years old, or you may be eligible due to specific exceptions, such as making a purchase of your first home.
Conclusion
Discovering these untaxed income sources can help you overcome financial difficulties without affecting your income tax burden. With options like HSAs, IRAs, and margin loans to HELOCs, you have a range of choices that suit your individual circumstances, so it’s always a good idea to consult with a financial advisor or tax expert to get personalized advice.
About the author: Allison Alexander, Certified Financial Planner (CFP), Certified Public Accountant (CPA), and Certified Divorce Financial Analyst (CDFA).
Allison Alexander is a financial advisor at Savant Wealth Management in Rockford, Illinois. She focuses on assisting individuals dealing with major life changes, such as retirement, the loss of a spouse, divorce, or selling a business.
This information is for educational purposes only and should not be considered a substitute for personalized investment or tax advice from Savant.
