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3 important things to know before deciding which state to withdraw from



The state you retire in can have a big impact on your senior years, for better or worse. For some older people, the decision to retreat to things like closeness to family and climate boils over.

But there are economic implications to consider from state to state as well. These are especially three to focus on when considering your choices.

1. State income taxes can eat away at nest egg withdrawals

Just as you are responsible for state taxes on your income when you hold a job, your state-level income is taxed upon retirement. And with "earnings" we are talking mostly about distributions from the IRA or 401 (k).

  Map of the United States.

IMAGE SOURCE: GETTY IMAGES.

There are seven states – Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming – that do not have an income tax, so if you move to one of these, you can rest assured that the money you withdraw from the retirement savings plan will only be subject to federal taxes (unless you live your savings in a Roth IRA or 401 (k), in which case withdrawals are completely tax-free). On the other hand, California, Hawaii, New Jersey, Oregon, Minnesota and New York have some of the highest state tax rates in the country.

Your takeaway? See what the tax rates look like for each state on your list and use this information to inform your decision.

2. Some states tax Social Security benefits

There is a high chance that Social Security will be a significant source of income for you during retirement. If it is your only source of income, you can avoid federal taxes on your benefits, but if you have other income, whether from a retirement savings, retirement or part-time job, you are likely to be taxed at the federal level benefits.

But that's not all. There are 13 states that impose a tax on social income, and if you retire in one of them, you could end up losing even more of those benefits. These states are:

  1. Colorado
  2. Connecticut
  3. Kansas
  4. Minnesota
  5. Missouri
  6. Montana
  7. Nebraska
  8. New Mexico
  9. North Dakota
  10. Rhode Island
  11. Utah
  12. Vermont
  13. West Virginia

Most of the above states offer an income-based exemption that allows you to avoid tax on benefits if you are not a particularly high income earner. But Minnesota, North Dakota, Vermont, and West Virginia offer no exemption at all, so keep in mind when limiting your choices.

3. Medicare plan options vary by state

It is easy to think of Medicare as a national health program, but in fact, the state you resign in may dictate the type of coverage you receive. While coverage under Parts A and B, which cover hospitals and preventive care, respectively, is universal wherever you live as a senior, the offerings for Part D plans may vary from state to state. Part D covers prescription drugs, and some states offer a greater variety of Part D plans – and less expensive plans – than others.

The same is true if you plan to enroll in Medicare Advantage instead of original Medicare. The cost and availability of benefit plans may vary by state, so be sure to do some research before you settle into your future home.

There are many non-economic reasons for moving in one state over another, but before you make that call, remember to remember the above points. The last thing you want is an extra dose of money-related stress during your senior years.


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