Published on: October 15, 2020

The 5 Most Tax-Friendly States for Retirees

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    You’ve worked your entire life to prepare for retirement, and a lot goes into maximizing your savings. Those funds determine the things you can enjoy and how much money you will have as you move through the rest of your life, after all. The last thing you want is to end up with higher taxes than you planned for, as those amounts can quickly suck money out of your account and leave you wondering where your savings went. 

    Many people choose to move when they retire, either to be closer to family or to a state with a climate that fits your preferences. The good news is that certain states’ taxes can positively impact your long-term savings, so make sure you know the most tax-friendly states for retirement before you plan your move.

    What Goes Into Saving for Retirement

    People do many things to save for retirement. You may have an IRA account, a savings account, private pensions, a 401(k), and more. Saving for retirement is highly personal and depends on a lot of factors like:

    elderly couple doing taxes in on one of the most tax-friendly states for retirees
    • Your lifestyle
      What do you want to do during retirement? What type of lifestyle do you want to lead? The more you expect to do — like traveling or picking up other financially costly hobbies — the more you need to save.
    • Your debts
      What debts do you still have as you move into retirement? Do you have the funds to continue paying down those debts? If not, those debts need to be factored into your monthly and annual expenditures.
    • Your anticipated medical expenses
      If you have a serious medical condition, for example, you may need to consider how paying for your care will increase over time. You’ll also want to anticipate potential conditions down the road and have a cushion just in case.
    • Taxes
      What do taxes look like in your area? What is the sales tax rate or the estate tax?

    Understanding your needs — including local taxes — can help you plan for retirement and better understand how much money you need to have set aside. 

    Which Taxes Impact Retirees?

    As a retiree, you may have different tax considerations than someone who is actively working. These include:

    • Social Security Taxes
      Even in retirement, you will have to pay attention to Social Security taxes, which could total between 15% and 45% of the taxable portion of your income.
    • IRA and 401(k) Withdrawals
      When you withdraw from your retirement accounts, you can expect to pay taxes on those amounts. Your rate will depend on how much you withdraw at a time.
    • Pension Income
      If you have income from a pension, that income will be taxed.
    • Annuity Distribution
      Annuities will be taxed just as they were before your retirement.
    • Investment Income
      You will continue to pay taxes on your investment income, just like when you were working. You may face lower taxes if you have less overall income coming in than you did during your pre-retirement years for your estate tax, however. 

    The 5 Most Tax-Friendly States

    Ready to start planning your retirement move? These are some of the best states for retirees in terms of tax burdens. 

    1. Wyoming
      Wyoming has no state income tax, and the average state and local sales tax hovers around 4%. That makes Wyoming the ideal place for retirees looking for a state that does not tax excessively.
    2. Alaska
      Alaska has no state income tax, nor does it have a sales tax. It’s important to consider the cost of living before planning your retirement move, however, because Alaska does have a comparatively higher one than many other states.
    3. Nevada
      Like Alaska and Wyoming, Nevada does not have a state income tax, but does have a high sales tax averaging over 8%. Social Security benefits are not taxed, which is a perk, but the state also does not provide tax breaks for seniors.
    4. Delaware
      Delaware, like Alaska, does not have a state sales tax, which can help your retirement dollars stretch further. It does have a state income tax of about 6.6%, however,  which could cause your savings to take a hit without a low tax.
    5. South Dakota
      You can expect not to pay a state income tax in South Dakota. It has an average state and local sales tax of just 4.5%, too, making it excellent for retirees, and does not have an estate tax (although a federal estate tax can be applied).

    The Least Tax-Friendly States for Retirees

    While many states offer retirement advantages for retirees, some simply do not. If you’re planning a move to the following states, you may want to carefully consider how their tax policies will impact your retirement income.

    social security money that is taxed outside of the most tax-friendly states for retirees
    • Nebraska — taxes Social Security income and most retirement account withdrawals
    • Connecticut — taxes Social Security income and has the fourth-highest property taxes in the nation
    • Kansas — taxes any individual making more than $30,000 or any couple making more than $60,000 annually. It does not offer waivers or credits for seniors on Social Security or pensions.
    • Wisconsin — has high state income tax, sales tax, and high property taxes
    • Minnesota — offers a high taxable income that includes Social Security and Pensions
    • Other states to avoid: New York, Massachusetts, Maryland, New Jersey, California, Rhode Island, and Illinois

    You may want to avoid these states if possible, or at least work with a trusted tax advisor to keep your tax foundation straight during your retirement years. 

    The Benefits of Working With a Trusted Tax Advisor for Retirement Taxes

    Retirement is a big step personally, professionally, and financially. You want to make sure you get the process right! Working with a trusted tax advisor can help ensure that you’re making the most of your retirement funds and taking all the right factors into consideration as you make your plans. That expert can help set you up for success in your retirement years, plus ensure you understand state, federal, and local taxes and how they can impact your available funds with the lowest tax. 

    Finding a tax-friendly state for retirees can make a big difference in your retirement destination, including the funds you have available. Contact Silver Tax Group today to discuss your questions about tax-friendly states for retirement, or to speak with an expert about other tax-related questions you might have about a tax bill.

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