Even in retirement you’ll likely owe your fair share of taxes. If your retirement savings are kept in a 401(k) or traditional IRA, you’ll generally have to pay income taxes on your withdrawals each year. You’ll also typically be responsible for federal taxes on your Social Security benefits. Depending on what state you live in, you could pay state taxes on your monthly checks, too. (Dallas Tax Savings: Best States For Retiring)
Taxes can potentially take a big chunk out of your retirement budget. If your savings are meager to begin with, having to give a significant chunk of your income to Uncle Sam can make it even more challenging to afford retirement.
Sometimes, though, choosing the right retirement destination can help ease the tax burden in your golden years. Some states are more tax-friendly to retirees than others. These seven are among the best in the country if you’re looking to make a move in retirement.
The most tax-friendly states for retirees
Seven of the best states for retirees tax-wise are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Why these states? Primarily because none of them have income tax, which is likely one of the heftiest taxes you’ll face in retirement. Particularly if most of your income is coming from a 401(k), traditional IRA, or pension.
But there’s an added bonus to moving to any of these seven states: They also don’t tax Social Security benefits. That’s good news for people who will be depending on their monthly checks for a significant portion of their retirement income. Because the more of your benefits you can keep for yourself, the more comfortable retirement will be.
Keep in mind that this doesn’t mean you’ll be able to escape taxes altogether in retirement. For example, you’ll likely have to pay federal taxes on up to 85% of your Social Security benefits (unless your benefits are your sole source of income — then you may be able to avoid federal taxes altogether).
It’s important to consider the overall tax picture as well. Since you’ll also be responsible for sales and property taxes. The good news is that all seven of these states have lower-than-average overall taxes compared to the national average. Alaska, in particular, has the lowest tax burden in the country, with just 6.5% of income in the state going toward state and local taxes (compared to the U.S. average of 9.9%), according to the Tax Foundation.
Before you move, make sure you look into the state and local taxes you can expect to pay in your new home. Then, think about how that will affect retirement. Will you be paying exorbitant property taxes in your new city? If so, you might consider choosing a different location or simply renting instead. High sales tax could put a damper on your retirement if you’re planning on doing a lot of spending.
Is it worth it to move in retirement to lower taxes?
If you’re currently living in a state that’s not the most tax-friendly, does that mean you should move in retirement to save money? The short answer is that it depends.
Before you make any big decisions, look at the big picture and weigh the pros and cons of moving. Taxes aren’t the only expense you’ll face in retirement. Be sure you know what you’re getting into financially before you move. For example, Washington might be tax-friendly for retirees, but many cities in the state have a higher-than-average cost of living. So you might save money on taxes, but depending on exactly where you decide to call home, you could end up paying more overall.
The same could be said about any state. As the cost of living will likely vary widely depending on the city you choose. Before you start packing your bags, do some research to determine how your prospective new city compares to your current one. If you find you could lower your taxes and your general expenses by making the move, it could end up saving you loads of cash in retirement and making your golden years much more enjoyable.
Finally, one other factor to consider doesn’t involve your finances, but rather how moving will affect your quality of life. Really think about whether you’ll be OK with potentially leaving friends and family behind to start fresh in a new city. For some people, the thought of making such a major life change is terrifying, regardless of how much money they could save. For others, moving to a new state could be the adventure of a lifetime.
Choosing the right retirement destination can have a major impact on your financial future.
You could potentially save thousands of dollars per year in taxes by moving to a more tax-friendly state. But it’s important to make sure it’s the right choice for you. If you’ve done your homework and decided to make the move, it could be one of the best decisions of your life. (Dallas Tax Savings: Best States For Retiring)
Call Williams & Kunkel CPA today in Flower Mound at 972-446-1040 to have a chat and find out how you can save money on your taxes as a real estate professional.
Source: The Motley Fool