We know lots of friends who are considering moving from a high-tax state, such as New York, to a state with low or no state income taxes. They think they will end up with more money, although they are torn because they may also be moving away from family and friends just to escape state taxes.
What I advise them to do is think about spendable income — the amount they’ll have to spend after taxes — and not just low or zero tax rates. If you have more money to spend after paying the tax bill wherever you currently live, you might as well stay where you are, if it’s closer to the grandkids. You may be able to pay for at least one warm-weather winter trip, too.
Design a Smarter Retirement Income Plan
Before making life decisions about moving (or downsizing, purchasing insurance, etc.) retirees ought to know their number for their total starting income, and have a plan for retirement income that includes a projection of income and savings, and all planning assumptions.
The income plan ought to cover:
- Starting income
- Inflation protection
- Beneficiary income protection
- Spousal income (if applicable)
- Plan management (when plan assumptions are not realized)
- Market risk to plan (when markets fluctuate)
- Legacy passed on to beneficiaries or heirs
All these subjects are covered in articles on Kiplinger.com. In one article, How to Generate an Extra $20,000 a Year in Retirement, we examined the income from our favorite investor (a 70-year-old woman with $2 million of savings, of which 50% is in a rollover IRA). We saw a large before-tax income advantage from Income Allocation planning. Even if she invests a portion of that to meet her legacy objective, she still has a $20,000 advantage in spendable annual income.
The question is whether she gives back that advantage in federal and state income taxes in her home state of New York.
Reducing your Combined Federal/State Retirement Tax %
You may have heard that New York is a high-tax state, and that’s true. It ranks No. 7 on Kiplinger’s list of the 10 least tax-friendly states for middle-class families.
Importantly, most states exclude Social Security income from taxation, as well as a portion of IRA distributions and employer pension plans. Together with interest on state and local bonds that is not taxed, a retiree has a head start in reducing state income taxes.
But the question remains how much of that advantage is eaten up in New York state income taxes. The key for our Go2Income planning is that annuity payments …….