We all want out retirement savings to last as long as possible and reducing your tax bill in retirement can be a great way to stretch every dollar.

One of the biggest factors that will determine your tax bill in retirement is where you live and surprisingly, there are significant tax differences depending on which state you decide to retire in.

But we have to mention that states have 3 main types of taxes that they levy. Income tax, sales tax, and property tax. You will want to pay attention to all 3 before you make a decision on where to live.

Your Retirement IncomeMost retirement income is often made up of 3 things. A pension (if you have one), Social Security, and distributions from retirement accounts (your 401k, TSP, IRAs, etc.).

On the federal level, all 3 of these income sources can be taxable. At the state level, it will vary state to state.

Social SecurityMany people I talk to are surprised to find out that Social Security benefits can be taxable at all. And if you have a healthya amount of retirement income then you will have up to 85% of your benefits taxed on the federal level.

The good news however, is that most states don’t tax your Social Security benefits. There are just 13 states that do and they are the following: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.

Each state has their own criteria and structure for this taxation.

Your Pension

On the federal level, most pensions will be taxable but exactly how your pension is taxed will depend on the details of the plan.

But again, there are many states (14 to be exact) that do not tax pension income at all. Here they are: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming New Hampshire, Alabama, Illinois, Hawaii, Mississippi, and Pennsylvania.

Some of these states don’t have an income tax at all while others just exclude pension income from their income tax.

Your Retirement Account DistributionsAs Roth accounts become more and more popular, more folks will be able to enjoy at least some tax free income in retirement. But as of today, the vast majority of peoples’ savings are in traditional accounts (traditional IRA, traditional 401k, traditional TSP) which means that it will at least be subject to federal taxes when it comes out.

And while most states tax retirement account distributions as well, these 12 don’t: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming, Illinois, Mississippi and Pennsylvania.

The Best States to Retire ToAs you probably noticed, there are many states that don’t tax any of the 3 main sources of retirement income which can go a long way in helping money stretch as long as possible.

But as I mentioned before, a state has 3 common ways to levy tax. Income tax, sales tax, and property tax. And often when a state doesn’t have an income tax then they have to make up for it with higher than average sales or property taxes. On top of that many cities have substantial taxes of their own.

And while there is no perfect place to retire, moving to lower tax states can be a great way to stretch your savings for as long as possible.

Disclaimer: This is meant for educational purposes only and is not tax, investment, or legal advice. Dallen Haws is an investment advisor for Haws Financial Planning

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