There are a lot of things to consider when approaching retirement, but one of the most important is certainly finances. Retirees are making the bold choice to go without working for the rest of their lives. That means living off the money they've accumulated over the years, until the day they die.
So its no wonder that it causes people so much angst. In fact, in a 2021 poll the National Endowment for Financial Education (NEFE) found that 85% of Americans that some part of their personal finances is causing them stress. Of those people, 31% stated that “having enough saved for retirement” was a top concern.
Which is why retirees should consider moving to a state that doesn't tax retirement income. Examples of retirement income are distributions from IRAs and 401(k) plans or pension payouts.
There are actually 13 states that don't tax retirement income. However, today we're going to look at what I consider to be the top 3.
What makes these the top 3 states?
When looking to recommend which states Americans should move to in retirement, we had to look at more than just taxes on retirement income.
When evaluating these 13 states, we also considered which states had additional tax advantages. Beyond retirement income, there are estate taxes, property taxes, state tax and more. So those states with the lowest tax burden would certainly be at the top of our list.
Yet if you're an American looking to save money, there is also the Cost of Living Index (COLI) to take into consideration. This index looks at all the costs of living in any state, and gives it a score out of 100, with 100 being the national average. Ideally, retirees want to live in a state with a lower COLI.
Finally, we evaluated the housing market in each state.
The 3 Top States
Tennessee
Coming in third place is the state of Tennessee, which not only doesn't tax retirement income, but also personal income in general. This could certainly be beneficial if you're a retiree that ends up needing to go back to work.
There is also no inheritance of estate tax in Tennessee, no taxes on Social Security, pensions, or retirement plan distributions. The state even has a property tax freeze program for homeowners over the age of 65.
The population has about a 17.3% share of residents over 65%, according to United States Census data, with a 90.4 on the COLI for residents living in the state, according to the World Population Review. Overall, it's certainly a budget-friendly choice for retirees, with a growing population.
In fact, the state is one of the few in the country with over one million residents over the age of 65, according to the Administration for Community Living. With every aspect of the state's cities coming in below-average in terms of living costs, including healthcare, there are major financial benefits to living in the state.
As for what you'll need to spend living there, there is a state sales tax that comes in at about 9.5%, so that will certainly hurt when buying essentials. As for home costs, the current median home price was $434,900, according to Redfin (RDFN).
Florida
In second is the Sunshine State, sometimes referred to as America's waiting room. Yet it doesn't seem to be doing much waiting any more.
Florida has seen a large influx of younger people to the state, with many choosing to come during the pandemic. With warm weather all year round, and a tax-friendly environment, there has been a shift towards other generations moving to the state.
Even so, the state remains one of the top choices for Americans in retirement. There aren't any taxes on retirement income, personal income, or on your estate either. Furthermore, a $2.7-billion tax relief package recently passed, exempting many items from sales tax.
Florida has a large amount of its population above 65, with 21.3% residents currently in the age group. Its COLI, however, has been rising. It currently has a 102.3 on the index, making it 2.3% higher than the national average.
As the state's population continues to explode, seeing the most migrations into the state of any other in the last year, prices may continue to rise. So while you're saving taxes, you may end up paying more.
That includes on housing, with the state average at $408,600, according to Redfin. That being said, this certainly differs wildly depending on where you settle down, with Naples seeing an average at $725,000, and Miami at $584,000, for example.
Wyoming
So with one state charging you high rates in sales tax, and another with rising costs, perhaps the best option would be to consider the state of Wyoming.
Wyoming is quickly becoming known as a tax haven for many, even beyond retirees. That being said, it still has the space to take in many new residents without seeing costs rise much higher.
There are no taxes on any retirement income, nor from interest or dividends. Residents are met with zero taxes on personal income, corporate taxes, estate taxes, pretty much anything that could be taxed by the state.
The population is far lower than the other states on this list at just over half a million. Even among that population however, 18.6% are above 65 at this point. This continues to increase year after year.
As for the COLI in this state, Wyoming falls below the national average at 92.8 on the COLI. This has made it attractive to those living in surrounding states, with four states having a COLI above the national average.
When it comes to buying a home, the median cost came in at an incredibly low $262,000 according to Redfin, making it by far the most affordable. But if you're still having trouble in retirement, eligible seniors can delay up to 50% of property taxes in retirement.
So with the only tax you're meant to see on a regular basis a low 4.5% sales tax, there really is the lowest tax burden possible for retirees, making it the top choice for those seeking the least amount of taxes in retirement.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
