Your tax bill will vary in retirement depending on which state you call home.  Some states are tax-friendly to retirees and their income.  Others, not so much.  Once you no longer have a job anchoring you in place, you have more freedom to evaluate your options.  To help do that, here are three questions to ask.

1) What are my sources of retirement income?  The typical retiree gets his or her income from a variety of sources.  Some of the more common sources include a pension, Social Security, part-time work, IRA distributions and dividend income.  Different states tax those income sources differently.  States like Alaska, Florida, Texas, South Dakota, Nevada, Washington and Wyoming have no personal income tax at all.  More than half of the states exempt Social Security benefits from tax.  States like Illinois and Mississippi exclude income from retirement plan distributions.   Nearly two dozen states exempt military and government pensions.  As you mull over where you want to retire, think about your income sources and then work with your financial and tax advisers to determine your potential tax burden in the states you’re considering.

2) How will I spend my retirement income?  Just because a state has low or no income tax doesn’t mean that your tax bill will be low.  Some states, like Alaska, have a genuinely low tax burden.  Other states, like Arizona, have low income taxes, but high sales taxes.  Depending on how you spend money during retirement, a high sales tax (or a high property tax) can be just as much of a burden as a high income tax.  In short, beware the tax “shell game” that some states play.  Rather than genuinely trying to reduce the tax burden, they simply change which pocket they take it from.

3) What other factors should I be considering?  When deciding where to retire, taxes are an important piece of the decision, but they aren’t the only piece.  Don’t get so hung up on your tax bill that you forget to consider things like proximity to family and friends, climate, cost of living, quality of medical facilities, entertainment options and outdoor activities (e.g. mountains, oceans, etc.).  Make your decision based on all those factors and you’ll not only have a fun, meaningful retirement, but you might even have a little extra money in your pocket to pay for it.

~ Joe


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