The Best States to Retire in Based on Taxes

Each year various clients will inquire about what states are the most tax friendly during retirement. Unfortunately, there is no easy answer, however, let me give you a basic checklist of considerations. Instead of looking solely at taxes, you should look more broadly at additional factors that impact your cost of living.

Most individuals will look specifically at state income taxes when determining the best solution -states like Florida or Texas come to mind. With that being said, that is a very narrow look at what you should be evaluating. This post is dedicated to laying out some important factors regarding taxes and other considerations before you determine the ideal location to spend your retirement years.

State taxes income – Yes, you should look at this first because it may have the largest monetary impact. The higher your income, the more sensitive you are to this tax. If you are taking IRA distributions, receiving a pension or receiving passive income from a business, all of these would be reduced by state income tax.

There are 7 states at have no state income tax. Based in Minnesota, we have one of the highest state income tax rate at 9.85%. Feel free to go to www.taxfoundation.org/maps to see each state.

Sales tax/local tax – Depending on your activities and how much you plan to spend, you may want to put some consideration in to each states sales tax rate. This can add up over time depending on lifestyle.

Housing – Whether you plan to rent or buy, this needs to give be given serious consideration when determining your retirement destination. If you are moving in to a geography that has more expensive housing you may lose all of the savings gains by less income tax. If you plan to own a home, you should factor in property tax relative to your current rate.

Areas near lakes, rivers or oceans are going to command a higher purchase price and rental rate. Also, seasonality will command higher prices. Retirees tend to flock toward warmer climates near water. Demand may increase your cost of living.

Cost of goods and services – Very simply can you maintain the lifestyle you desire at a more or less cost than you currently? I encourage you do to your research!

Medical Insurance – Recent implementation of the Affordable Care Act as made drastic changes to the landscape of medical insurance. For people retiring before the age of 65, you will have to sign up for medical insurance through a state or federal exchange. Overlooking this could drastically increase your expenditure.

Example: In Minnesota, we are fortunate enough to have one of the lowest costs of rates. The average 64 has a rate of $401/month. Whereas, a popular retirement state, Florida, has a monthly rate of $581.¹

Relocation- Remember that moving is an expensive. Whether you have family to help you or hire a moving company, the cost to relocate or add a second residence is very costly. If would encourage you to reconsider the move if you are doing it solely for taxes as this is another cost that would eat away at the tax savings.

In conclusion, there is no perfect answer to the best state to call retirement home. I encourage you to start with the checklist and then take a hard look at the lifestyle and cost of everyday living you desire. Each of these points is going to have a greater or lesser weighting based your lifestyle.

1. Manhattan Institute of Public Policy, 2014.