When you think of retirement, you might think of puttering around the house, catching up on projects, and spending time with family and friends. But a wiser plan might be to ditch the homestead and the neighborhood pals and strike out for greener pastures. Where you live can dramatically affect how much of your retirement money stays in your pocket. Relocating to an area with lower taxes can help you stretch your retirement funds considerably.
There may be no escaping federal income taxes, but state income taxes can sneak up and take a significant bite out your wallet. Your first thought may be to head for a well-known retirement destination with no state income tax such as Florida or Texas, but there are many issues to weigh before making a move, such as:
- State and local sales tax
- Property tax
- Estate and inheritance taxes
- Housing costs
- Insurance premiums
- Relocation and annual travel costs
- Quality of life factors (recreation, security, lifestyle)
A major consideration is the state’s laws governing taxes on different types of retirement income. Different states have different rules governing taxes on Social Security income, government, military or private pensions, and disbursements from retirement accounts such as IRAs and 401(k)s. Review state tax laws that apply to your particular retirement portfolio when considering relocation.
To help in the hunt for ideal places to relocate, here is a list of 10 retiree-friendly states:
1. Alaska. While this polar state might not be everyone’s idea of a retirement paradise, there is a certain undeniable appeal to the fact that the state has no state income tax and no state sales tax. In addition, all residents (after the first year) receive a hefty annual dividend check from the state’s oil coffers. Many older residents are exempted from property taxes on the first $150,000 of assessed value.
2. Alabama. With a mild southern climate, and attractive real estate prices, Alabama is an overlooked retirement spot. Homeowners over 65 are exempt from state property taxes and the state has a lower-than-average state sales tax of 4%. There are no taxes on pensions or Social Security.
3. South Carolina. South Carolina is another state popular with snowbirds fleeing colder climes and seeking lower taxes. There is no Social Security tax and couples can deduct the first $30,000 of retirement income from their state taxes. Up to $10,000 in military benefits can also be deducted. State sales tax is 6% but prescription drugs are exempted. The sales tax falls to 4% at age 85. Property taxes are low and older taxpayers qualify for a homestead exemption that further reduces their tax liability.
4. Mississippi. Property taxes are some of the lowest in the U.S. and there are no pension or Social Security taxes. Distributions from IRAs, 401(k)s and other qualified retirement accounts are also excluded.
5. Nevada. Nevada has no state income tax and food and prescription drugs are exempted from the 6.85% state sales tax.
6. Pennsylvania. Social Security and pension income are exempt in PA. The Keystone state also keeps its paws off retirement accounts such as IRAs and 401(k)s. Be aware that property taxes vary widely from place to place.
7. South Dakota. There is no tax on Social Security benefits or on any other pension income. The state sales tax is a below-average 4%, and prescription drugs are exempt. Homestead exemptions and other tax reductions are available to seniors.
8. Tennessee. While there is no tax on Social Security or other pension income, dividends and interest are subject to tax. The state sales tax, at 7%, is on the high side.
9. Wyoming. Pensions and Social Security income get a free ride in this income-tax-free state. Sales tax is a low 4%, and prescriptions and food are untaxed. These facts, plus low property tax rates give Wyoming residents one of the lowest overall tax burdens in the country, putting this state high on the list of retiree-friendly places to relocate.
10. Delaware. This tiny state has no state sales tax, and state income taxes are on the low side with exemptions for Social Security and other qualified income for taxpayers over 60. A credit toward property tax is also available for homeowners over 65.