Unfortunately, taxes are an inevitable part of life.
Even in retirement, you are likely to owe your fair share of taxes. If your pensions are saved in a 401 (k) or traditional IRA, you generally have to pay income taxes for your withdrawals each year. You will also usually be liable for federal taxes on your social security benefits, and depending on which state you live in, you may also have to pay state taxes for your monthly checks.
Taxes can potentially take a big chunk out of your retirement budget, and if your savings are slim at first, having to give a significant portion of your income to Uncle Sam can make it even more challenging to afford retirement.
But sometimes choosing the right retirement goal can help ease the tax burden of your golden years. Some states are more fee-friendly for retirees than others, and these seven are among the best in the country if you want to take a step into retirement.
The most tax-friendly states for retirees
Seven of the top states for retirement are fiscal: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Why these states? First and foremost is that none of them have income tax, which is probably one of the most expensive taxes you will suffer in retirement – especially if most of your income comes from a 401 (k), traditional IRA or pension.
But there is an added bonus to moving to one of these seven states: They also do not tax social security benefits. This is good news for people who will depend on their monthly checks for a significant portion of their retirement income, because the more of your benefits you can keep for you, the more comfortable retirement will be.
Remember this does not mean that you will not be able to escape taxes entirely upon retirement. For example, you will probably have to pay federal taxes up to 85% of your social security benefits (unless your benefits are your only source of income – then you may be able to avoid federal taxes altogether).
It is important to take the overall tax picture into account, as you will also be responsible for sales and property taxes – and some states have higher taxes than others. The good news is that all seven of these states have total taxes above the average compared to the national average. In particular, Alaska has the lowest tax burden in the country, with only 6.5% of state income going toward state and local taxes (compared to the US average of 9.9%), according to the Tax Foundation.
Before you move, make sure you look at the state and local taxes that you can expect to pay in your new home, and then think about how it will affect your retirement. Will you be paying unreasonable property taxes in your new city? If so, consider choosing a different location or simply renting instead. Or if the sales tax is soaring, it can lead to your pension if you plan to spend a lot.
Is it worth moving to retirement for lower taxes?
If you "are currently living in a state that is not the most tax-friendly, does that mean you should retire 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 are not the only cost you will receive in retirement, so make sure you know what you are getting financially before you move. For example, Washington may be tax-friendly for pensioners, but many cities in the state have a higher cost of living than average, so you can save money on taxes, but depending on exactly where you decide to call home, you can ultimately pay more in total.
The same can be said about all state, as the cost of living is likely to vary greatly depending on the city you choose. Before you start packing your bags, consider how your potential new city compares to your current one – both in terms of tax If you think you can lower your taxes and your general expenses by moving, it can ultimately save you lots of cash on retirement and make your golden years much more enjoyable.
Finally, another factor to think about may not involve your finances, but rather how touching will affect your quality of life. Really think about whether you will be happy with the potential of leaving friends and family behind you to start new in a new city. For some people, the idea of making such a big life change is daunting, no matter how much money they can save. For others, moving to a new state can be the adventure of life.
Choosing the right retirement destination can have a major impact on your financial future. You can potentially save thousands of dollars a 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 have done your homework and decided to do it, it may be one of the best decisions of your life.