Finances
This is the savings method to avoid taxes and keep 100% of your social security, IRA, and 401(k) income
Retirees in the United States can maximize their income by considering specific state tax policies and using them to their advantage.
As you approach retirement, the prospect of stretching your hard-earned savings becomes paramount. This is especially relevant given the economic pressures that can come out of nowhere with, for example, a new president. And while federal taxes on Social Security benefits and retirement account withdrawals are a given, state taxes can vary widely, potentially impacting your nest egg.
The good news? Some states offer significant tax advantages for retirees.
States with no income tax
Currently, nine states impose no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In these states, your Social Security benefits and withdrawals from traditional IRAs and 401(k) plans are not subject to state income tax, allowing you to retain more of your retirement income.
States that don’t tax retirement income
Beyond the nine states with no income tax, several others specifically exempt certain retirement incomes. For instance, Illinois, Mississippi, and Pennsylvania do not tax distributions from 401(k) plans, IRAs, or pensions. Similarly, New Hampshire, while lacking a broad income tax, has historically taxed interest and dividends. However, as of January 1, 2025, this tax has been repealed, making it even more retiree-friendly.
Considerations beyond taxes
While the allure of tax-free retirement income is strong, it’s essential to weigh other factors when choosing a retirement destination. States without income taxes might compensate with higher property or sales taxes. Additionally, the cost of living, healthcare quality, climate, and proximity to family and friends play crucial roles in retirement satisfaction.
For example, while Texas boasts no income tax, it has relatively high property taxes. Conversely, Florida offers both no income tax and a relatively moderate cost of living, making it a popular choice among retirees.
Making the move
If you’re contemplating relocating to a more tax-friendly state, ensure you establish clear residency to benefit from its tax policies. This typically involves spending a majority of the year in the state, obtaining a driver’s license, registering to vote, and other indicators of permanent residence.
As you can see from this brief overview, while no strategy can entirely eliminate taxes, choosing to reside in a state with favorable tax laws can significantly enhance your retirement income. Just make sure that you carefully consider state tax policies alongside other personal factors before making informed decisions that align with your financial goals and desired lifestyle.
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