Many people work all of their lives to create a nest egg that will carry them through retirement. Unfortunately, taxes can take a significant chunk out of retirement accounts like 401(k)s, traditional IRAs and pension income.
The good news is that there are ways to limit or possibly even eliminate these tax payments. Some states in the U.S. offer tax breaks to retirees, while others exempt the most common types of retirement income from taxation. Those who live, or plan to live, in one of the following states may be able to keep more of their retirement savings.
For those who do not mind the cold, Alaska can be a cost-effective place to retire. Residents of the Last Frontier do not have their IRA, 401(k) or pension income taxed. In addition, Alaska does not tax Social Security benefits and does not have an estate tax or inheritance tax.
If you prefer warmer temperatures, consider retiring in balmy Florida. In addition to sandy beaches and coastal blue waters, residents can enjoy a lack of income tax, meaning retirement pensions are not taxed. There are no state taxes on retirement distributions from 401(k)s or IRAs and the Sunshine State does not tax Social Security benefits.
Like Florida, Hawaii can be a relaxing destination for adults that want to retire in style. Moving to the Aloha State can also save retirees money. Retirement distributions from public and private pension plans are tax-free in Hawaii if the account holder did not contribute to the pension.
Any contributions made by employees on any portion of the pension income will be taxed. Distributions from IRAs and 401(k)s are treated the same for tax purposes as they are for federal tax purposes. Hawaii also does not tax Social Security benefits.
The tax rate in Illinois is relatively low at a flat 4.95 percent. Although it is not one of the most tax-friendly states in the U.S. for retirees, it is the only state in the Midwest that completely exempts IRA, 401(k) and pension income from tax.
However, tax-free 401(k) or pension income must be derived from a qualified employee benefit plan. Like many other states, Illinois does not tax Social Security benefits.
Mississippi offers tax benefits for retirees who meet certain requirements. The state will not tax retirement income if a person is at least 59.5 years old. However, if a person retires early, the state will take a portion of a 401(k), IRA or pension plan.
The tax rate in Mississippi is currently three percent at its lowest and five percent at its highest. There is no inheritance or estate tax for residents, and Mississippi does not tax Social Security benefits.
Nevada residents can enjoy an array of benefits in terms of state income taxes and retirement taxes. The Silver State does not tax a person’s pension or other income because there is no income tax. There is also no tax on IRA and 401(k) contributions. Like the other states mentioned, Nevada also does not tax Social Security benefits.
In Pennsylvania, residents are not taxed on their pension income from any eligible employer-sponsored retirement plan. However, there is an exception for people that retire early.
Payments from IRAs and 401(k) plans can also avoid state taxation as long as the person does not retire early. Pennsylvania has a low, flat income tax rate of 3.07 percent and an inheritance tax that ranges from 4.5 to 15 percent. Social Security benefits are not taxed.
South Dakota can also be an attractive place to retire for those who want to avoid having a bulk of their retirement savings go to Uncle Sam.
The state does not impose any income tax, meaning there is no tax on pension income. In addition, there is also no tax on withdrawals from 401(k) or IRA accounts. Those who collect Social Security benefits are also safe from tax burdens.
While Tennessee does impose some income taxes, they are highly limited compared to other states. Income tax only covers interest and dividends, and retirees do not pay tax on IRA, 401(k) or pension income. Retirees can also enjoy their Social Security benefits without fear of taxation.
Washington is a great place to retire as there is no income tax. None of the retiree’s retirement funds are hit by taxes, including IRAs and 401(k)s. Social Security benefits are also safe from taxes.
Speak with a Wealth Manager Today
Moving to a state that has limited taxes paid in retirement can be a financially wise choice. For more information about what states will let you avoid income tax in retirement or to speak with an experienced wealth manager, contact the financial professionals at Campbell Wealth Management.
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This is intended for informational purposes only and should not be construed as tax advice. Consult your tax advisor regarding your situation.