Whether you have recently retired or are nearing retirement age, you'll likely be thinking about your long-term financial situation. Before you start withdrawing from your 401(k) or spending your Social Security benefits, keep in mind that your retirement income can be taxed depending on the state you live in. Each state has different laws that dictate how retirement income is taxed, some of which are detailed in the following guide.
Massachusetts
Massachusetts isn't considered tax friendly as a result of high property tax rates and a flat income tax of 5%. Estate taxes must also be paid. Keep in mind, however, that income from government employee pensions and Social Security isn't taxed. Property taxes are high.
Michigan
Michigan maintains a flat tax rate of 4.25% on all taxable income. Property taxes are high at a rate of $1,448 for every $100,000 of assessed value on your home. The main benefit of living in Michigan as a retiree is that the sales tax rate is just 6%.
Minnesota
Minnesota has an income tax rate of 5.35% on taxable income of less than $39,810 for married joint filers and $27,230 for individual filers. This rate climbs to 9.85% on all income you earn above $166,040 for individual filers and $276,200 for joint filers. Your Social Security benefits can also be taxed.
Mississippi
Mississippi has a tax rate of 3% on all taxable income between $3,001-$5,000. This rate increases to 5% for income above $10,000. Along with a Social Security income tax exemption, retirees also benefit from a tax exemption on 401(k), IRA, and public pension withdrawals. Property taxes aren't too high.
Missouri
Missouri has a tax rate of 1.5% on taxable income between $108-$1,088. Any income above $8,704 is taxed at a rate of 5.4%. Most retirees will benefit from a tax exemption on Social Security benefits, public pensions, and private pensions. It's possible for local sales tax rates to be high.
Montana
Montana has an income tax rate of 1% on as much as $3,100 of taxable income. This tax rate reaches a high of 6.9% on all taxable income above $18,700. Nearly all types of retirement income are taxed. The same is true of Social Security benefits. A tax exemption may be available for annuity and pension income.
Nebraska
Nebraska maintains a tax rate of 2.46% on taxable income of up to $3,290 for individual filers and $6,570 for joint filers. The tax rate increases to 6.84% on income above $31,750 for individual filers and $63,500 for joint filers. The state does have an inheritance tax. Most of your retirement income can also be taxed.
Nevada
Nevada is among the most tax-friendly states since there aren't any state income taxes. If you live in Nevada, you can benefit from not having to pay an inheritance tax or estate tax. Property taxes are also relatively low. The sales tax is somewhat high at a rate of 6.85%.
New Hampshire
New Hampshire doesn't collect state income taxes. However, a 5% tax is required on interest or dividends above $2,400 for individual filers and $4,800 for joint filers. Property taxes are also very high at a rate of $2,050 for every $100,000 of assessed value on your home. Keep in mind that New Hampshire doesn't have a sales tax.
New Jersey
New Jersey has an income tax rate of 1.4% on as much as $20,000 of taxable income. Any taxable income above $1 million is taxed at a rate of 10.75%. Property taxes are more than $2,400 for every $100,000 of assessed value on your home. Nearly all retirement income and Social Security benefits are exempt from taxes.
There are many different types of retirement income that can be taxed, which is why each state can have many different guidelines for how much taxes residents are required to pay. If you have a considerable sum of savings in a 401(k) or IRA account but aren't expected to receive much in the way of Social Security benefits, it might be best to settle down in a state that doesn't tax retirement accounts and plans. If you already live in the state you want to retire in, this guide should help you plan your future financial situation.
Sources:
https://www.aarp.org/money/taxes/info-2020/states-that-dont-tax-retirement-distributions.html
https://smartasset.com/retirement/retirement-taxes
https://www.aarp.org/money/taxes/info-2020/states-that-dont-tax-retirement-distributions.html
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
