After years of hard work and retirement, you have noticed that your retirement plan income will be subject to taxation.
Retirees can extend the life of their savings, however, by moving to an area where taxes are lower. It is advantageous to pay fewer taxes, mainly if one is on a fixed income.
Retirees can help their savings last longer by moving to a place with lower taxes. Please note, that states that don’t have an income tax might seem like a good option, but many collect revenues in other ways.
That might be through steep property or sales taxes. Such taxes can offset the lack of an income tax.
Income tax may be your top priority if you expect to have a good income or if you continue to work part-time after retirement.
Property and sales taxes might be more of a concern if you’ll be living on Social Security. These benefits are exempt in many states.
States to consider
If you’re thinking of moving somewhere else, consider one of the 12 states that don’t tax distributions from pensions or defined contribution plans, such as 401(k) plans.
Nine of those states that don’t tax retirement plan income simply have no state income taxes at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
The remaining three — Illinois, Mississippi, and Pennsylvania — don’t tax distributions from 401(k) plans, IRAs, or pensions.
Alabama and Hawaii don’t tax pensions but do tax distributions from 401(k) plans and IRAs. It’s important to note, that Alabama and Hawaii don’t tax pensions but do tax distributions from 401(k) plans and IRAs.
High tax states to avoid
Listed below are a few states that are less kind to retirees. Not only are some of their tax rates high, but they also fully tax pension income and 401(k) and IRA distributions.
According to the Tax Foundation these states and their top tax rates are:
California: 13.3% on incomes over $1 million ($1,198,024 for married filers of joint returns), but Social Security benefits aren’t taxed here.
Minnesota: 9.85% on incomes over $166,040 ($276,200 for married filers of joint returns).
Vermont: 8.75% on incomes over $204,000 ($248,350 for married filers of joint returns).
Idaho: 6.925% on incomes over $11,760 ($23,520 for married filers of joint returns), but Social Security benefits that are included on a federal return aren’t taxed.
Connecticut: 6.99% on incomes over $500,000 ($1 million for married filers of joint returns).
Nebraska: 6.84% on income over $32,210 ($64,430 for married filers of joint returns).
West Virginia: 6.5% on income over $60,000 (for both single filers and married filers of joint returns).
Rhode Island: 5.99% on income over $150,550 (for both single filers and married filers of joint returns).
Kansas: 5.7% on income over $30,000 ($60,000 for married filers of joint returns).
North Carolina: 5.25% on all income, but Social Security benefits aren’t taxed.
Massachusetts: 5% on all income, but Social Security benefits included in federal income aren’t taxed.
Arizona: 8% on income over $250,000 ($500,000 for married joint filers) but Social Security benefits that are included on a federal return aren’t taxed.
Indiana: 3.23% on all income, but Social Security benefits aren’t taxed.
North Dakota: 2.9% on income over $440,600 (for single filers and married filers of joint returns).
Paying less
Ideally, we would all like to have our retirement savings last for as long as possible. Lowering your tax bill when you retire can be an excellent way to maximize your retirement funds.
A tax planner can assist you in understanding your tax bill in retirement. It is all about where you live and understanding the state, county, and city income tax, sales tax, and property tax in your area.
