The State Tax Move That Could Transform Your Retirement
When you’re earning $200,000 in California and handing over 9.3% to the state every year, retirement seems far off. But think about this: if you retire to Texas or Florida, which have no state income tax, every dollar you pull from your IRA keeps more cents in your pocket. Over a 25-year retirement, that difference can add up to more than $50,000 in tax savings.
The Zero Income Tax States
Nine states don’t tax personal income at all:
- Alaska — no sales tax either, but the cost of living is high
- Florida — warm weather, established retirement communities
- Nevada — no income or estate tax
- New Hampshire — only taxes interest and dividends
- South Dakota — no income, estate, or inheritance tax
- Tennessee — recently eliminated their tax on interest and dividends
- Texas — big state, lots of variety, no income tax
- Washington — no income tax, though sales and property taxes are higher
- Wyoming — low population, minimal taxes across the board
Running the Numbers
Here’s a realistic scenario I put together:
Retiree profile:
- $1.2 million in a traditional IRA
- Withdrawing $60,000 annually in retirement
- Social Security: $30,000 annually
- Total income: $90,000
State tax comparison on that retirement income:
- California (up to 9.3%): roughly $5,500 per year
- New York (up to 6.85%): roughly $4,100 per year
- Illinois (flat 4.95%): roughly $3,000 per year
- Florida or Texas (0%): $0 per year
Over a 25-year retirement:
- Moving from California to Florida: $137,500 in avoided taxes
- Moving from New York to Texas: $102,500 in avoided taxes
Even accounting for inflation and larger withdrawals over time, those savings are substantial.
States That Don’t Tax Retirement Income Specifically
Beyond the zero-income-tax states, several states give retirement income a break:
- Pennsylvania — no tax on 401(k), IRA, or pension distributions regardless of your age
- Mississippi — no tax on qualified retirement income
- Illinois — exempts retirement income from state tax
These states still tax wages and other income, but retirement distributions get favorable treatment.
The States to Think Twice About
Some states hit retirement income hard:
- California — taxes all retirement income as ordinary income, up to 13.3%
- Vermont — no retirement exemptions, up to 8.75%
- Minnesota — taxes retirement income, up to 9.85%
- Oregon — no sales tax, but up to 9.9% income tax on retirement
Beyond Income Tax: The Full Picture
State income tax is just one piece. You also need to consider:
Property taxes: Texas has no income tax but property taxes average 1.8% of home value, among the highest in the country. Florida averages 0.89%.
Sales tax: Tennessee has no income tax but charges 9.55% sales tax when you include local rates. Oregon has no sales tax.
Estate and inheritance taxes: Some states tax inheritances even when the federal estate tax doesn’t kick in. Pennsylvania charges up to 15% on inheritances going to non-lineal heirs.
Cost of living: Tax savings don’t mean much if housing, healthcare, and daily expenses eat up the difference.
How to Establish Residency
To claim tax residency in a new state, you typically need to:
- Spend more than 183 days (half the year) in the new state
- Get a driver’s license there
- Register to vote there
- Use the new address on tax returns and financial accounts
- Maintain your primary residence there
States like California and New York aggressively audit former residents who claim they’ve moved. Keep detailed records: cell phone location data, credit card statements, doctor visits. You need to prove you actually relocated.
The Rollover Connection
Where you live when you take IRA distributions matters. If you roll over your 401(k) while living in California but plan to retire in Texas, the rollover itself has no tax consequence. But every distribution you take while still a California resident gets hit with California tax.
Some strategies to consider:
- Delay large IRA distributions until after you establish residency in a low-tax state
- Consider Roth conversions before moving. Pay tax at your current rate now, then move and withdraw tax-free later
- Time your move to minimize the complexity of filing taxes in two states
Is Moving Worth It?
For someone looking at $50,000+ in projected tax savings, relocation deserves serious thought. But money isn’t everything. Being near family, having access to good healthcare, weather preferences, community connections: these all matter too.
Run the numbers. Visit places you’re considering. Talk to a tax professional who understands multi-state residency issues. The savings are real, but they have to fit your life, not just your spreadsheet.
