If you are a federal employee who has 25 or more years of federal service, chances are you are thinking hard about becoming one member of the “retirement tsunami” predicted by the Office of Personnel Management that will be overwhelming federal agencies in the next several years.
If you are thinking hard about retirement, you face an important decision: Where do you want to live?
This can be a complex decision. When you are working, the decision about where to live is often made by where your job is located and where you can make the most money. You may decide to move to the Washington, DC area while an active federal employee to build up your retirement annuity because you are likely to make more living in the Washington metropolitan area than in many other areas of the country.
On the other hand, you may find that big-city living isn’t for you when you retire. If you bought a nice house for $100,000 in Alexandria, Virginia back in 1978, that house may be worth $600,000 or more now depending on the usual real estate factors (location, location and location). You could sell the house, take the money from the sale and move.
There are advantages to living in Washington or any other big city but there is more congestion, higher taxes, and that $600,000 or more you may get from selling your house may buy a magnificent luxury condo on the ocean or in the mountains or a beautiful golf resort far away from the stresses of your former life as a hard-working federal employee (Check out the options at this one Florida beach and golf community which has advertised on the FedSmith site.). Of course, there are also more restaurants movie theaters, and other entertainment venues in a large city than you will find in areas with a smaller population. And, if you are retiring, you will want to consider where your children, relatives and friends may be living and how far away you want to move from these people important to you.
There are also considerations such as climate. If you like warm weather, you might be inclined to check out cities in Florida where the weather is warmer than most other parts of the country. In some parts of the state, housing is relatively inexpensive and there are communities that cater to retirees. Phoenix and Southern Calilfornia are other retiree hot spots and they all have some advantages. (Check out Looking for a Warm, Sunny Retirement Haven?)
When you retire, you have choices that you do not have when you are working. If you have always wanted to move to a different area, you can do so–or at least you are not restricted by your job from moving.
There are also financial considerations. One of the biggest considerations is taxes. Some states give retirees a tax break. It may not sound like much but the extra money you may find yourself handing over to state and local taxing authorities during the last few decades of your life can make a difference in how well you live.
Several readers have written in recently asking about the best states for retirees with the primary consideration being taxes. Below you will see a list of states that do not tax income from federal pensions. Before you check over the list and start packing your bags, please note these very important disclaimers because your situation may be different than that others.
First, this is a broad list. Our American tax structure is horrendous. It is complex, difficult to understand, expensive to administer and you will probably need a tax lawyer or a tax adviser to tell you about any complications you may encounter. Just because your former office mate found that a state was ideal, you may find it is a tax hell for reasons that did not apply to your colleague.
Second, there are numerous variations on state and local taxes just as there are with federal taxes. I am not a qualified tax adviser and don’t make any claim to know the details of the tax structure of all states and localities–including those you may be considering as your retirement haven.
Third, tax laws change and may change quickly (even after you make the big move). What may have been accurate several years ago may no longer be accurate. Check with your tax adviser for any changes that may have occurred during the recent sessions of the legislature in a state in which you have a particular interest. I have put together a list from several sources based on relatively recent information but make no claim as to the accuracy today or next month or next year. Pay your tax adviser for the most recent advice you can get for the particular state and town you are considering before making your big move.
For example, several lists of states with no income tax do not include Florida. Florida does not have an income tax. It did have an intangible personal property tax under which a person paid a small percentage of tax based on the total value of stocks and bonds. That tax was eliminated in the past year so Florida is now a state that does not have an income tax. If you are a retiree in Florida and have substantial assets in mutual funds, bonds or stocks, your income just went up because you no longer have to pay this tax.
In fact, when you research, you will find different value and lists because of how the figures are calculated. But, to assist you in making your decision, here are some lists that may be a good starting point. (Check out this retirement housing guide as well.)
Here are ten states that exempt all federal, state and local pension income from taxes:
- Alabama
- Hawaii
- Illinois
- Kansas
- Louisiana
- Massachusetts
- Michigan
- Mississippi
- New York
- Pennsylvania
Several other states also do not tax pension income but have various restrictions. For example, some states have different tax rates depending on the years in which government service was performed, or the date on which a person retired, or the date on which the government service was first started. One example: North Carolina does not tax annuities beginning with 1998 if an individual had five years of government service as of August 12, 1989.
Perhaps you are planning to retire but work part-time. Which states offer the best deal on state income taxes?
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not have a personal income tax. Tennessee and New Hampshire claim not to have a personal income tax but that isn’t entirely true. They do tax income from interest and dividends.
Sales taxes can also play a role in your decision. Sometimes, a state with a low income tax rate (or no state income tax at all) will make its money from high sales taxes. Before you decide to retire, sell your house, and move to your retirement paradise and buy a new Mercedes, check out the sales tax rate. A tax of 9% on that expensive luxury car may make a difference in your decision. Check out these states with the highest tax rates (including an average for city and county tax rates) as compiled by the Retirement Living Information Center:
- Tennessee (9.4%)
- Louisiana (8.7%)
- Washington (8.5%)
- New York (8.25%)
- Arkansas (8.15%)
- Alabama (8.05%)
- Oklahoma (8.05%)
- California (8.0%)
And where is your lowest tax burden as a percentage of total income?
- Alaska (6.6%
- New Hampshire (8%)
- Tennessee (8.5%)
- Delaware (8.8%)
- Alabama (8.8%)
On the other hand, you may want to avoid Vermont (14.1%), Maine (14%), New York (13.8%) and Rhode Island (12.7%).
Are you confused now? No one said our tax structure was designed for the convenience of individual citizens. But pay close attention. The COLA you get with your federal annuity will not make you rich and you will probably want to cut down on your expenses before you make your final retirement decisions.
