Many people plan to retire in their home states and towns, but if you are among the more money-savvy crowd, you know that doing so may not be in your best financial interests. You know that some states are more “retirement friendly” than others when it comes to taxes.
The key is to identify the most tax-friendly of the bunch. SmartAsset helps you narrow down your options by providing an overview of all the factors that make a state “tax-friendly.”
Retirement account credits, deductions or exemptions
How the state in which you retire handles withdrawals from retirement accounts such as IRAs and 401(k)s can greatly affect how much money you have to work with in your golden years. Unfortunately, most states tax retirement income. As an example of how this might affect you, say your annual income from your 401(k) is $30,000. The state income tax rate is 4%. Each year, you would pay $1,200 on your income alone.
In states with retirement account exemptions or, better yet, income tax exemptions, you could use your full $30,000 without penalty. Even if your state does not offer exemptions, it may offer deductions and credits come tax-filing time.
Social Security income
If you receive Social Security income, the good news is that most states either do not tax it at all or, if they do, they provide credits and deductions to offset the liability. There are only four states that fully tax Social Security income. Those are Rhode Island, Nebraska, North Dakota and West Virginia.
Purchasing a home is a great way to lock in housing rates in retirement. However, you cannot lock in property tax rates, which have the potential to soar over time. Eventually, the cost of property taxes may offset any savings you enjoy as a result of homeownership. While you can do very little to control property tax hikes, you can move to a state that offers deferrals, exemptions or “circuit breakers.”
Some states offer property tax relief for seniors in the form of deferrals, which allow older people to defer taxes until a later date. Exemptions allow certain individuals to protect all or a part of their home’s value from property taxes. Circuit breakers work the same way as exemptions in some states and, in others, limit the amount property taxes may increase in any given year.
While you will never receive a final bill for your sales taxes, they are something to consider seeing as you will be on a fixed income in retirement. Ideally, the state to which you move will have no sale tax. Considering there are only five of those, though, look for a state that boasts a low sales tax and other retirement benefits.
If you are serious about saving money by moving in retirement, carefully weigh the pros and cons of each desired location. Also, consult with a professional who is familiar with various tax laws and who can guide you toward the most financially sound future.