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States That Won’t Tax Your Federal Retirement

It’s no secret that the United States tax system is complex. With tax rates and rules changing every year, it’s hard to keep track of what you owe and where you stand. For federal employees nearing retirement, one question that often comes up is whether their state of residence will tax their federal retirement benefits.

Even with Roth TSP becoming more popular, which is a method in which many federal employees can enjoy some tax-free income when they retire, the majority of all federal employees’ savings are in the traditional thrift savings plan. This means that most employees will be subject to federal taxes. 

Fortunately, there are a number of states that do not tax federal retirement benefits, making it easier for retirees to stay in their home state without worrying about paying additional taxes.

In this article, we’ll look at the states that don’t tax federal retirement benefits and how they compare to other states when it comes to taxes. If you’re looking for a place to retire that won’t overtax your income, keep these states in mind!

Learn More About State Taxes and Your Federal Retirement Income

Getting yourself ready for retirement is a big task. Not only do you have to think about your own personal finances, but you also have to make sure that you understand the tax implications of your retirement income. If you’re a federal employee, there’s an additional layer of complexity, as not all states tax federal retirement income in the same way.

To make matters worse, the tax rules can change from year to year. This makes it important to stay up-to-date on the latest tax laws and how they might impact your retirement income.

Your retirement income will likely come from a number of sources, including your federal pension, Social Security, and any personal savings or investments you have. Each type of income may be taxed differently. For example, your federal pension is considered taxable income, while Social Security benefits may not be taxed at all if your income is below a certain threshold.

It’s also important to note that even if a state doesn’t tax federal retirement benefits, you may still owe taxes on your other retirement income, such as Social Security or investments. Be sure to check with your tax advisor to see how your specific situation will be impacted by the tax laws in your state.

Not many people realize this, but Social Security benefits are taxable. In fact, up to 80% or higher of their benefits will be subject to federal taxes, especially if the individual has a healthy amount of TSP (thrift saving plans) and pension when they finally retire.

Fortunately, not all states tax social security benefits, and these states include:

  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • New Mexico
  • Rhode Island
  • Utah
  • and a few other states

States That Don’t Tax Federal Retirement Benefits

While some states tax all forms of retirement income, others exempt federal retirement benefits from taxation.

At retirement, most of your pension will be taxable. The government calculates how much you pay into the system over your lifetime and spreads it out over your expected lifespan in retirement. The amount they figure to be your contributions will be tax-free, but most of your pension will be taxed. The tax rate on your pension will depend on a number of factors, including your income and the amount of your pension.

In general, the higher your income and the larger your pension, the higher the percentage of your pension that will be subject to taxation. However, there are a number of ways to minimize the tax burden on your pension. For example, you can choose between a lump sum payment and an annuity, which will allow you to spread the taxes over several years.

You can also make withdrawals from your pension gradually, which can help to keep your overall tax liability down. There are many options to consider when it comes to taxation on your pension, so it’s important to speak with a federal retirement agent to determine what option is best for you.

While most states do tax pension income to some extent, some states do not tax this income at all. These states include the following:

  • Alabama (which exempts Social Security and military pensions from taxation)
  • Alaska
  • Florida
  • Hawaii (which exempts Railroad Annuities from taxation)
  • Illinois (which exempts Social Security and railroad pensions from taxation)
  • Mississippi (which exempts Railroad Annuities from taxation)
  • Nevada
  • New Hampshire (which exempts pension income from taxation)
  • Pennsylvania
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

This can be a significant advantage for retirees on a fixed income. In addition to saving on taxes, retirees in these states also benefit from not paying state income taxes on their pension income.

While some states don’t have an income tax, others exclude pension income from taxation. This means that if you’re retired and living on a fixed income in those states, you may not have to pay state income taxes. This can be a big advantage, especially if you live on a tight budget.

Some states that don’t tax pension income include Alabama, Florida, and Nevada. A few states also exempt military retirement pay from state income taxes. If you’re a retiree, check your state’s tax laws to see if your pension income is subject to taxation.

Tips for Maximizing Your Retirement Income

No matter what state you live in, you can do a few things to maximize your retirement income and reduce your tax liability.

One of the best ways to reduce your tax liability is to take advantage of tax-deferred retirement accounts, such as a 401(k) or an IRA. By contributing to these accounts, you can reduce your taxable income and grow your retirement savings tax-free.

Another way to reduce your taxes is to consider relocating to a state that doesn’t tax pension income. This can be a great way to stretch your retirement income and make it last longer.

Finally, be sure to speak with a tax advisor to ensure you’re taking advantage of all the tax breaks and deductions available. There are several ways to reduce your taxes in retirement, and a tax advisor can help you maximize your tax savings.

Speak With a Licensed Agent

When it comes to retirement planning, there are many factors to consider. From Social Security benefits to taxation on your pension, it’s important to understand the ins and outs of retirement before making any decisions.

A licensed agent can help you understand the tax implications of your retirement and plan for a secure future, providing guidance on minimizing your tax liability and maximizing your retirement income. If you’re nearing retirement or have any questions about retirement planning, consult with a licensed agent today; they can help you navigate the tax laws in your state and plan for a comfortable retirement.

Final Thoughts

If you’re nearing retirement, it’s important to understand the tax implications of your pension income. Depending on where you live, your pension may be subject to state income taxes. Although, some states do not tax federal retirement benefits at all. However, keep in mind that while some states will exempt such taxes, they may make up for this by increasing other taxes such as sales taxes, property taxes, and other substantial taxes on their own. For that reason, careful consideration of not only federal income taxes but many other taxes will allow you to pick a state you can finally call home, living a financially sound life! If you’re looking for a tax-friendly state to retire in, check out the above list of states that don’t tax pension income.

There are several other ways to maximize your retirement savings, too; you can contribute to tax-deferred accounts such as 401(k)s and IRAs or consider relocating to a state that doesn’t tax pension income. Speak with a licensed agent today for more tips on maximizing your retirement income.

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