Retirement should be a time of relaxation and travel, an opportunity to do all of the things you’ve wanted to do now that you’re no longer tethered to a job or raising kids. But fulfilling your retirement dreams takes money.
According to the TransAmerica Center for Retirement Studies annual report, the average baby boomer has around $289,000 saved for retirement. Add in $21,384 per year in Social Security and you don’t have a ton of money to play with. One way to stretch limited funds is to relocate to an area that gives tax breaks to senior citizens. Below is a list of states that are tax-friendly and what kind of breaks they give to those hitting their golden years.
What Qualifies as Retirement Income?
Retirement income consists of pensions, IRAs, 401(k)s, Social Security and annuities that provide retirement income and the sale of stocks, bonds and mutual funds you’ve owned for over a year. Each of these forms of income is taxed differently and some, depending on the state you live in, aren’t taxed at all.
States That Don’t Tax Income at All
Eight states – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — have no personal income tax. This includes pension income and military benefits. That said, some states may have higher taxes in other areas to compensate for the lack of personal income tax. For instance, Florida has higher than average property taxes. While Texas has not only high property taxes but a hefty sales and use tax.
New Hampshire doesn’t tax personal income, but it does have a 4% tax on dividends and interest with a total gross from all sources of $2,400 for individuals. This tax is set to be phased out by 2027. So if you’re looking to retire in New Hampshire you may want to consider putting it off for a few years.
States That Don’t Tax Pension Income
A pension is defined as a retirement arrangement in which your employer promises you a regular payment from the day you retire, for as long as you live. While pensions are becoming rarer (only 6% of boomers born after 1950 have a pension), those that are lucky enough to have one will find that six states — Alabama, Illinois, Iowa, Hawaii, Mississippi and Pennsylvania — exclude pension income from state taxes.
States That Don’t Tax Social Security
While you’re eligible to receive Social Security benefits as early as age 62, you won’t receive full benefits until age 67. Those planning on cashing in before full retirement may want to look to move to a state that doesn’t tax Social Security. These states include Oregon, Idaho, Arizona, Oklahoma Missouri, Iowa, Wisconsin, Illinois, Louisiana, Alabama, Arkansas, Georgia, South Carolina, North Carolina, Virginia, Indiana, Ohio, Kentucky, Pennsylvania, Maryland, Delaware, New York, Massachusetts, New Hampshire and Maine.
States That Don’t Tax 401(k)
A 401(k) is a way to save money for retirement. Not only do you put money in each year, but your employer may also add contributions. You can begin to withdraw funds from your 401(k) as early as age 59 1/2 and are required by the IRS to withdraw funds at age 72.
States that don’t tax 401(k) include Alaska, Illinois, Florida, Nevada, New Hampshire, South Dakota, Mississippi, Pennsylvania, Washington, Texas, Wyoming and Tennessee. That said, in Mississippi and Pennsylvania, this tax break is valid only if you retire after age 59 1/2. If you retire before then, you may be subject to taxation.
States That Don’t Tax Military Benefits
Those who have served active duty in the U.S. military for 20 years or more and are age 60 are eligible for retirement benefits. According to World Population Review, “both military disability retirement pay and veteran’s benefits, including service-connected disability pension payments, are typically excluded from taxable income.”
Arkansas, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania and Wisconsin don’t tax military benefits.
Nine states tax military retirement benefits, but only partially. These states include Colorado, Delaware, Idaho, Kentucky, Maryland, New Mexico, Oregon, South Carolina, West Virginia and the District of Columbia. Know that in some of these states, the tax benefits start as early as 55 years of age; in others, you may not receive military tax breaks until you reach age 65.
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