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One of the biggest items on your retirement budget is taxes. If you're thinking of moving somewhere else, consider one of the 12 states that don't tax distributions from pensions or defined contribution plans such as 401(k) plans.
A lack of tax
Nine of those states that don't tax retirement plan income simply have no state income taxes at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. The remaining three — Illinois, Mississippi and Pennsylvania — don't tax distributions from 401(k) plans, IRAs or pensions. Alabama and Hawaii don't tax pensions, but do tax distributions from 401(k) plans and IRAs.
State Taxes and Retirement Distributions
Taxing retirement plan distributions isn't an all-or-nothing proposition. For example, 29 states offer a full break on taxes on military retirement income, according to Wolters Kluwer, a provider of tax information and services. Alabama, Arkansas, Connecticut, Hawaii, Idaho, Illinois, Kansas, Louisiana, Maine, Massachusetts, Missouri, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, West Virginia and Wisconsin don't tax military retirement income. Other states allow part or all of military retirement income to be taxed. Virginia only allows Congressional Medal of Honor recipients to exclude their military retirement income.
Other states only tax part of retirement income. For example, Colorado allows taxpayers who are 65 and older to subtract $24,000 from federal adjusted gross income (AGI) — the basis for state tax. Connecticut allows teachers to subtract 25 percent of retirement income from federal AGI. Be sure to check with a tax professional to see what tax breaks, if any, you can get from your state, or a state where you're considering living.
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Taxes aren't everything
Some states with low or no income taxes have higher property or sales taxes. For example, while Illinois does not tax retirement income, it has one of the highest sales and property taxes in the U.S. Other low-tax states may have fewer programs that you might find helpful, such as senior centers and public transportation.
Ultimately, where you live in retirement depends on what you can afford — and what makes you happy. If you have a beloved child or grandchild in a high-tax state, you may figure the extra taxes are worth being nearby.