Best States to Retire: Tax-Free Retirement, Cost-of-Living, and Quality of Life
Uncovering a sanctuary where state tax authorities don’t touch your retirement income is the ultimate way to a more secure and comfortable retirement. The prospect of keeping more of your Social Security, pension, and retirement savings isn’t merely wishful thinking; it’s a tangible reality in select tax-friendly states across the U.S. This comprehensive guide sheds light on the advantages and considerations of residing in states that exempt your retirement income from taxation. It empowers retirees, military veterans, and future planners to make well-informed decisions for their golden years.
Additionally, we’ll explore the states with the lowest cost of living, highest quality of life scores, and states with inheritance and estate tax to address potential estate planning concerns.
It’s advisable to consult your state’s official website for up-to-date information on tax laws. While we’ve made every effort to compile information on each state’s tax laws, it’s important to recognize that tax regulations are subject to frequent changes. Please be aware that regardless of the state you retire in, there is no exemption from federal taxes.
What Makes a State Retirement-Friendly?
States with the Lowest Cost-of-Living
When finding an afforable state to live in, the cost of living typically refers to the average expenses associated with basic necessities such as housing, groceries, transportation, healthcare, and utilities. States with lower costs of living generally have more affordable housing, lower taxes, and lower overall expenses compared to states with higher costs of living. Additionally, the cost of living may also encompass factors like the availability of affordable healthcare, quality of education, and recreational activities, which can vary significantly from state to state.
Here are the top 10 states with the lowest cost of living, ranked from the most afforable state, Mississippi.
- Arkansas
- Mississippi
- Alabama
- West Virginia
- South Dakota
- Oklahoma
- Kentucky
- North Dakota
- Iowa
- Louisiana
States with the Highest Quality of Life
Quality of life scores encompass more than just state tax laws. What’s truly important is whether you’ll genuinely enjoy the area you’ll call home in retirement. Assessing ShareCare’s quality of life score involves reviewing their Community Well-Being Index, which considers various proven factors such as physical health, financial stability, social connections, community engagement, sense of purpose, healthcare accessibility, food availability, resource accessibility, housing, transportation, and economic security. For those interested, the index can be further explored at the city and county levels – Sharecare Community Well-Being Index
Here are the top 10 states with the highest quality life of scores, ranked from the happiest state, Massachusetts.
- Massachusetts
- Hawaii
- New Jersey
- Maryland
- New York
- California
- Connecticut
- Washington
- Colorado
- Utah
Assessing State Tax Policies on Social Security, Pension, and Retirement Distributions
When evaluating how retirement-friendly a state is, one of the critical factors is its taxation policies on retirement income. States that do not tax retirement income, including Social Security, pensions, and TSP/401(k)s, stand out as havens for retirees. These states exempt retirement income from state income taxes, allowing retirees to keep more of their net take home pay. The absence of a state income tax rate on these distributions significantly impacts a retiree’s net income and financial freedom during retirement.
Comparing States with No Income Tax vs. Those That Do Not Tax Retirement Income
There’s a notable distinction between states with no income tax and those that specifically do not tax retirement income. States like Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not have personal income tax at all, which extends to retirement income. However, some states may have income tax but offer exemptions for different types of retirement income.
States without Income Tax
States with No Income Tax – Will Social Security be Taxed?
States with no income tax will extend those exemptions to Social Security benefits. This policy further reduces the taxable income of retirees, ensuring that their Social Security benefits support a more comfortable lifestyle without the deduction of state taxes. It’s an essential factor for retirees, as Social Security benefits constitute a significant portion of income for many.
Analyzing the Tax Treatment of Social Security Retirement Benefits Across States
The tax treatment of Social Security retirement benefits varies significantly across states. While 9 states tax Social Security benefits to some extent, the majority do not. This variance highlights the importance of understanding state tax laws and their impact on retirement planning. States that exempt Social Security benefits from taxation present a compelling advantage for retirees reliant on these payments.
States That Do Not Tax Social Security
States That Tax Social Security
States That Do Not Tax Pension Income
Living in a state that does not tax pension income can markedly enhance a retiree’s lifestyle. With no state tax on your pension, retirees can allocate more funds toward leisure, healthcare, and family support. This financial relief contributes to a more enjoyable and stress-free retirement, as the fear of dwindling savings due to state taxes diminishes. It is not just about the numbers; it’s about the peace of mind and quality of life that comes from financial security in retirement.
Retirees in Tax-Friendly States
Retirees in tax-friendly states often showcase the tangible benefits of such locales. These individuals typically report greater financial flexibility, allowing them to partake in more social activities, travel, and invest in their hobbies. The absence of tax on retirement income plays a crucial role in these positive outcomes, underlining the importance of selecting a retirement destination with favorable tax policies.
States That Do Not Tax Pension Income
Exploring States with No Income Tax on TSP, 401(k)s, and IRAs
To make the most of living in a state with favorable tax laws for retirement accounts, one must first understand the different types of retirement accounts and their associated tax implications. Thrift Savings Plan (TSP), 401(k)s, IRAs, and other tax-deferred retirement accounts usually offer tax-deferred growth, meaning taxes are paid upon distribution. In states that do not tax these distributions, retirees can enjoy the full value of their savings without a significant portion going to state coffers.
States That Do Not Tax TSP, 401(k), & IRA Withdrawals
How to Plan Your Retirement Distributions for Maximum Tax Efficiency
Planning retirement distributions for maximum tax efficiency involves considering both the timing of distributions and the state in which you reside. In states that do not tax retirement income, it may be advantageous to take larger distributions if you plan on moving to a more tax friendly state in retirement. The same idea would apply if you intend on conducting Roth conversions. Keep in mind, timing and amount should also account for federal income taxes and the potential impact on Social Security benefits taxation.
Military Retirement and State Tax Policies
For military retirees, certain states stand out for their favorable tax policies on military retirement pay. States that exempt military retirement pay from state taxes or offer significant deductions provide financial benefits that can influence a retiree’s decision on where to live. These policies acknowledge the service and sacrifice of military personnel, offering them a degree of financial relief in retirement.
States That Do Not Tax Military Retirement Income
States With Inheritance Tax & Estate Tax
When it comes to estate planning and managing your assets, understanding the inheritance tax and estate tax is crucial. These taxes can have a significant impact on the value of the estate that you leave behind for your heirs.
To lear in more about inheritance and estate tax check out our article States With Inheritance Tax & Estate Tax
What is Inheritance Tax?
Before understanding the nuances of inheritance tax, it’s essential to differentiate it from estate tax. While estate tax is levied on the estate as a whole, inheritance tax is imposed on the beneficiaries who receive the assets from the estate. This means that the tax liability is determined by the relationship between the heir and the deceased individual, which can result in varying tax rates based on the inheritor’s status.
There is no federal inheritance tax. Presently, only six states impose a state inheritance tax, each with its own rates and exemptions. It’s crucial for individuals to be aware of whether their state is subject to inheritance tax to effectively plan for the distribution of their assets.
States with an Inheritance Tax
Understanding Estate Tax
Estate tax is a federal tax imposed on the transfer of the estate of a deceased individual. For 2024, the federal estate tax threshold is $13.61 million for individuals, which means married couples don’t have to pay estate tax if their estate is worth $27.22 million or less. The federal estate tax limit is based on the value of the estate, taking into account assets such as cash, real estate, securities, and business interests. While the federal estate tax is uniform across the United States, some states also impose their own estate tax, further impacting the overall tax liability of the estate.
Thirteen states impose their own estate tax, each with its unique rates and exemption thresholds. Understanding the applicability of estate tax in your state is essential for accurate tax planning and minimizing the tax impact on your estate. Below is each state and the applicable exemption.
States with an Estate Tax
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we focus on retirement planning for federal employees. Learn more about our process designed for the career federal employee.
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