This is the 4th post in my retirement series:
Once you decide you want to retire early, you’ll want to evaluate where your post-retirement dollar goes the farthest. I hinted at this in my prior posts.
The first thing we need to evaluate is where are your post-retirement dollars coming from?
For the majority of retirees, I think their retirement money is going to come from a mix of 401k/403b (and 457), IRA, and Social Security. A smaller subset of retirees will also have a pension and/or disability.
So, simple enough, which states tax these things the least.
401k/403b (and 457)
These are pre-tax retirement vehicles, so you have to pay federal tax when you take the money out. You can’t get around that. You also may need to pay state taxes
Additionally, there are ways to try to minimize your tax burden by converting some of your 401k/403b into a Roth during early retirement. This is called building a Roth ladder which I will discuss in further detail in a later post.
These are post-tax retirement vehicles, so you don’t need to pay federal tax. However, like 401k/403b, you may need to pay a state tax… unless your state doesn’t tax them.
This probably won’t make up the majority of your retirement. However, if you really want to maximize your retirement dollar, retire to a state that doesn’t tax Social Security benefits.
For some of us, this may be a significant amount of your retirement. Some states do not tax pensions. For myself, I would never retire to a state that taxes my pension.
Like above, some states tax disability. Some don’t. If you are disabled and go into early retirement, not having your disability taxed helps significantly.
If you don’t have to pay sales tax, more dollars in your pocket.
This may come up. If you don’t have to pay it, great.
This also may come up. If you don’t have to pay it, great.
So, not too difficult right?
Just avoid taxes. So just retire to a state with no tax on:
Income, 401k/403b, 457, IRA, Social Security, Pension, or Disability
Bonus if there is no sales tax, inheritance tax, or estate tax.
Unfortunately, this list is very small:
Alaska – none of the above (the dream) *note: no state sales tax, but may have local sales tax
Wyoming – only 4% sales tax. Nothing else.
Nevada – only 6.85% sales tax. Nothing else.
Florida – 6% sales tax, can go as high as 7.5% in certain areas.
Mississippi – 7% sales tax. It does have income tax, but 401k/403b, 457, IRA, etc. are exempt.
So why does everyone retire to Florida?
I don’t have the answer. But probably because it’s always warm, but not really hot like Nevada is. And hey.. there’s the beach and Disney World.
However, if you really want to maximize your retirement dollars, retire to one of the above states with the lowest cost of living... which is:
If you really want your buck to go the farthest then Wyoming is the dream.
It has the lowest state sales tax, but also the lowest cost of living, allowing it to beat out Alaska overall.
More so than that, land/property is relatively cheap.
As for me, if things stay like they are, I’ll probably either retire to either Florida or Nevada, depending on where my kids end up. Alaska is also a consideration.
For the sake of completeness:
Hawaii’s stats are:
4% sales tax. (General excise tax)
401k distributions are taxed. However, if there were matching employer contributions, part of the plan is considered to be employer-funded and not taxed.
IRAs are fully taxed if funded by the individual (not a rollover)
Social security is not taxed.
Some pensions are not taxed.
Estates are taxed. Inheritance is not.
Overall, Hawaii is not a great place to retire to, but not the worst either. If most of your retirement comes from an untaxed pension and Social Security, it’s not a horrible option.
However, the high cost of living and high housing costs may make it difficult unless you already have property here.
Taxes can cut into your retirement significantly, so choose where you retire to wisely.
Wyoming is the dream overall, if you can live anywhere.
Alaska is a close runner-up to Wyoming, if you like the snow.
Florida is a good option, if you want to be warm.
Nevada is a good option, if you like it hot (and like casinos).
Mississippi is a good option, if you like the South.
Hawaii… isn’t great. Unless the majority of your retirement comes in the form of an untaxed Pension and Social Security.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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