When it comes to choosing where you will live out your golden years, there are a variety of factors to consider. Do you know the area? Is family nearby? One big consideration many retirees consider: taxes.
As you start looking, you’ll find that some states take a smaller bite out of your hard-earned nest egg than others. Here are some key factors to consider if you’re looking to determine the best states to retire tax-wise.
How is Social Security taxed?
When thinking about retirement, Social Security is usually one of the first things that comes to mind. These benefits are generally subject to federal tax, but it will depend on your total retirement income.
Only 13 states currently impose their own tax on Social Security benefits. They are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. And many other states offer exemptions for lower earners.
Other tax considerations
There are 12 states that don’t tax 401(k) plan or pension distributions: Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania (unless you take early retirement), South Dakota, Tennessee, Texas, Washington and Wyoming. Nine of these states (excluding Illinois, Mississippi and Pennsylvania), also don’t levy a state income tax. Alabama and Hawaii do tax distributions from 401(k) plans and IRAs, but neither one taxes pensions.
Keep in mind that you’ll want to consider the overall tax burden of any state, which you can research on each state’s government website. For example, Alaska, Delaware, Montana and Oregon don’t impose sales tax on consumers. Neither does New Hampshire, but it ranks in the top five for states with the highest property taxes.
Of course, taxes are important but they’re only one component of your retirement plan — and they likely won’t be the determining factor for where most people choose to live out their lives. So a big part of your planning will be figuring out your personal cost-of-living expenses for necessities like housing, food, health care, clothing, and transportation as well as for your interests, from job and educational opportunities to cultural activities.
Many of those considerations may work toward your financial benefit in retirement even more so than saving on taxes. A financial advisor can assist you with weighing your options for retirement planning to help you make decisions for your unique situation.
This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.