Planning where to live in retirement is an exciting time, and an important conversation to have with a spouse, partner or other loved ones before deciding on a location. Key considerations can include how close you want to be to family, desired climate, social connections, and access to healthcare services or community programs. Of course, tied to all of these topics is cost of living – and included in that discussion is how far your retirement income will go, based on the taxation policies of where you will live.
Looking closely at federal, state and local tax policies can provide a clearer picture of how far your money will go in retirement and may help steer where you’d like to reside. While federal rules apply uniformly, state and local tax rules can vary widely. With that in mind, it’s a good idea to speak with a qualified tax professional or attorney regarding your specific needs, but as you plan for these conversations this guide can help build your knowledge and understanding.
Let’s explore the topic in more detail by answering a few key questions.
Does the state where you plan to retire impose income taxes?
If the answer is no, this means pensions, retirement plan withdrawals, and other forms of income may be free from state income taxation. On the other hand, if the state where you live does impose an income tax, pay close attention to how much money is taken from your earned income or withdrawals to see if it might have a financial impact.
Additionally, take note that some states tax certain forms of retirement income (such as pensions or Social Security) more heavily than other states. It’s worth researching specific policies.
How does your state tax Social Security?
Not all states treat Social Security benefits the same way. While the federal government may tax a portion of your Social Security benefits based on your total income, some states also impose their own tax on those benefits. However, there are states that provide exemptions or don’t tax Social Security at all. Considering the varying rules, it can be beneficial to understand your state’s specific approach to help build a strategy that maximizes your Social Security payout. For more on this, visit ssa.gov.
Will your tax retirement plan withdrawals be taxed – and if so, at what rate?
Another key consideration is how your state taxes withdrawals from retirement accounts. This can vary widely – while some states fully exempt all income from taxation, including retirement plan withdrawals, others have varying degrees of taxation based on age, income thresholds and other factors. It can be beneficial to understand how tax may be applied to distributions from 403(b)s, 401(k)s or IRAs so you can plan accordingly.
What are your state’s rules for taxing investments?
Different states have different tax rates for dividends, interest and capital gains. Understanding the rules can help you build an investment strategy that helps maximize your long-term financial growth by minimizing your tax liabilities.
Will property taxes impact your finances?
Property taxes are often one of the largest ongoing expenses for retirees, especially if they plan to stay in their homes long-term. Understanding your property tax rate and the available property tax relief or exemptions for seniors can provide a fuller picture as you make your decision.
What are your state’s rules on sales tax?
Sales taxes are often overlooked during the retirement planning process, but they can impact your dayto-day and one-off expenses. It’s wise to factor them into your decision-making process since they can vary by city, county, state, or by other local taxing jurisdiction and may even vary by product or service purchased.
Does your state impose estate and inheritance taxes?
If you plan to leave a financial legacy for your children or heirs, understanding your state’s estate and inheritance tax rules is important. Some states have both taxes, some only one, and many have neither. Figuring out your state’s tax law in this area can help maximize the wealth you pass on to loved ones. A qualified tax professional can help you determine how your estate might be impacted based on where you plan to live in retirement.
Can you deduct state and local taxes on your federal return?
The SALT (State and Local Tax) tax deduction allows taxpayers who itemize deductions on their federal income tax returns to deduct taxes paid to state and local governments. Understanding the rule, and applying it when appropriate, could help reduce your income tax liability. However, it’s important to note that the SALT deductions may change in the future, reinforcing the importance of seeking advice from a qualified tax professional.
Have you discussed your retirement plans with loved ones?
Having conversations with family members well in advance of retirement can help create clarity for better planning. Discussing where you plan to live – whether it’s closer to family members or further away, or possibly even a plan to move abroad – and its overall implications can help you make the decision that’s right for you.
Understanding how your income sources and investments are taxed in retirement may be a key component in your discussions and your decision. Whether you’re planning to stay where you are or if you’re considering a move, having a strong understanding about tax policies based on location can help you make the most of your retirement savings and ensure a financially sound future.