What Are the Best States to Retire Tax-Wise?

When it comes to planning your dream retirement, one of the big questions you need to ask yourself is where you want to live out your golden years. You may be among those who are considering a retirement abroad. But even if you don’t plan to leave the United States, you may be thinking of retiring to a different state than the one you live in now. Perhaps it’s a place where you have spent vacations or maybe you have family there. As you’re weighing your options, there is one big consideration for retirees to factor in: taxes.

When 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 to tax-wise.

How is Social Security taxed?

When you’re 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 12 states currently impose their own tax on Social Security benefits. They are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, 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, South Dakota, Tennessee, Texas, Washington and Wyoming. Nine of these states (excluding Illinois, Mississippi and Pennsylvania), also don’t levy a state income tax. This includes New Hampshire; however, this state does tax interest and dividends, which can be a source of retirement income. 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.

Lifestyle factors

For most people, taxes are not the determining factor for where most people choose to live out their lives. Though they are important, they’re only one component of your retirement plan. So a big part of your planning will be figuring out your personal cost-of-living expenses for necessities such as 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 help you weigh your options for retirement planning so you can make best 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.