Between your IRA or 401(k), and whatever’s hopefully available from Social Security and you’ve planned to accrue enough regular income to allow you to live comfortably (though not extravagantly) through your retirement. But have you factored in retirement taxes?
You know a portion of your savings must be paid to the IRS, and you may even have factored that into your calculations as you put money away. However, don’t forget state taxes must be paid as well, and some states take a heftier bite than others. Here are the five worst states in terms of retirement taxes.
Vermont has a state income tax of 3.55% on individual incomes up to $39,000, and 8.95% on incomes above $415,600. They also tax Social Security income the same way the IRS does, which can cause you to lose a significant portion of your benefits. Deductions are also limited to $15,000 a year for individuals or $31,500 for married couples.
Not only does Connecticut have a 3% income tax on individual income up to $10,000 and a 6.99% tax on incomes over $500,000, but they also have some of the highest property taxes in the country. If you plan on owning a home, it could become difficult on a fixed income.
Minnesota has a very high state income tax, nearly 10% for individual incomes over $155,650. Not only that, but sales tax is also very high, at 7.27%, or higher in certain counties that add their own sales tax. Food, clothing, and all drugs, both prescription and non-prescription, are exempt from this tax, but a lot of other necessities are not—and that can add up.
Unlike a lot of states, Oregon doesn’t tax Social Security, which is helpful. However, income from your IRA or 401(k) is taxed at the top rate for your bracket. What’s more, certain counties can add as much as 2% to that income tax rate. There’s a reason income taxes are so high in Oregon, and that’s because they have no sales tax. This means they need to make up for it in other ways.
Montana’s income tax starts out low, at a mere 1% for income up to $2,900. However, if you make just $17,400 per year, you have to pay the top rate of 6.9% on all forms of income, including social security and your IRA or 401(k).
These are just a few of the worst states for retirement taxes. Some of the other highly taxed states include California, New York, and New Jersey. If you’re living in one of these states, or planning on moving to one of them once you leave work, then consider your options carefully.
Be sure you’ve saved up enough to cover taxes as well as expenses, and still live comfortably. You may also consider moving to a less costly state, where your income will go further. Whatever you decide, the most important thing is not to get caught unawares. Decide where you want to live and find out from the start exactly how much you’ll need, including all taxes. Then take steps to put away enough that you’ll be able to live out your days without having to worry about running out of cash.