Many people do their best to plan and save for retirement, only to be caught off guard by a nasty surprise: taxes. A number of major sources of income for seniors are subject to taxes during retirement, such as traditional withdrawals from IRA and 401(k) plans, as well as retirement payments.
Social Security is another source of income that may be taxable, but not always. At the federal level, benefits taxes apply to seniors on moderate incomes or higher. And often those federal taxes are hard to avoid.
But avoiding state-level Social Security taxes isn’t that hard. That’s because most of the 50 states don’t tax distributions, and if you move to the right state, you can keep more of that money for yourself.
States that do not tax social security
Some states have no income tax at all. As such, Social Security benefits cannot be touched. But there are plenty of states that levy income taxes but still leave Social Security alone.
If you retire in one of these 37 states, you don’t have to worry about your benefits being taxed at the state level:
- New Hampshire
- New Jersey
- New York
- North Carolina
- south carolina
- south dakota
Should You Avoid States That Offer Tax Benefits?
It’s easy to see why seniors would rather avoid having their Social Security income taxed at the state level. But it’s also important to realize that some states that have tax breaks offer other benefits, such as a low cost of living and a temperate climate.
In addition, your goal may be to move closer to your family after you retire. And you shouldn’t necessarily be put off by the idea of state-level Social Security taxes.
For starters, many of the states that have tax breaks also offer exemptions for low and middle earners. Second, there are other steps you can take to lower your overall tax burden in retirement.
For starters, you can put your retirement savings into a Roth IRA or 401(k). While your contributions to one of these accounts will not give you a tax benefit, as a senior you can enjoy withdrawals tax-free.
You can also invest in a way that limits your tax liability. Loading municipal bonds, for example, is a good way to secure an income stream from interest payments without having to pay federal taxes. And if you buy municipal bonds issued by your state of residence, those interest payments are also exempt from state and local taxes.
Therefore, while it’s good to know which states do and don’t tax Social Security, you don’t necessarily need to make drastic changes to your retirement plans. Even if you to do eventually lose some of your benefits in state taxes, there are steps you can take to compensate.
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