We know lots of friends who are considering moving from a high-tax state, like New York, to a state with low or no income tax. They think they’ll end up with more money, although they’re torn because they can also walk away from family and friends just to evade state taxes.
What I advise them to do is think about disposable income – the amount they will need to spend after taxes – and not just low or no 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 also be able to afford at least one winter trip in warm weather.
Design a smarter retirement income plan
Before making life decisions about moving (or downsizing, buying insurance, etc.), retirees should know their numbers for their total starting income and have a retirement income plan that includes a projection of income and savings, as well as all planning assumptions.
The income plan should cover:
- Starting income
- Inflation protection
- Beneficiary income protection
- Spouse’s income (if applicable)
- Plan management (when plan assumptions do not materialize)
- Market risk to plan for (when markets fluctuate)
- Legacy passed on to beneficiaries or heirs
All of these topics are covered in articles on Kiplinger.com. In an article, How to Generate an Extra $20,000 a Year in Retirement, we looked at the earnings of our favorite investor (a 70-year-old woman with $2 million in savings, 50% of it in a rollover IRA). We have seen a significant pre-tax income benefit from income sprinkling planning. Even if she invests some of it to meet her inheritance goal, she still has a $20,000 advantage in annual disposable income.
The question is whether she returns that benefit 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 it’s true. It ranks 7th on Kiplinger’s list of the 10 least tax-friendly states for middle-class families.
It’s important to note that most states exclude Social Security income from tax, as well as a portion of distributions from IRAs and employer pension plans. With interest on state and local bonds not taxed, a retiree has a head start in reducing state income taxes.
But the question remains how much of that benefit is absorbed by New York State income taxes. The key to our Go2Income planning is that annuity payments are treated the same on New York and federal tax returns, which means tax benefits are deferred. And with some of the state-level adjustments mentioned above, the favorable tax treatment of annuity payments can be even more valuable.
Let me share with you the high-level items from our 70-year-old investor’s federal and New York State tax return.
Benefits and costs of this planning
For our investor, the income taxed by New York would be about $67,500, or about 40% of his total gross income. As a percentage of total income, state income tax is just over 2%. Even after adding federal taxes, his retirement tax rate is less than 15%. This leaves him with a big advantage in terms of disposable income. A traditional plan with no annuity payments and lower income actually pays more total taxes – with a combined tax rate of over 18%.
Thus, our plan generates more cash from savings, much of which is tax-efficient, and gives our retiree the freedom to live where they prefer.
And the cost? The main one is that annuity payments do not continue on your death until the premium has been collected.
You can choose a beneficiary protection feature that guarantees that the total annuity payments will at least equal the premium. However, this election will reduce the level of guaranteed annuity payments and some of the tax benefits. Or you can use the higher annuity payments to purchase life insurance. And these planning choices aren’t the only options you’ll have when it comes to beneficiary protection.
What if the lure of zero state income tax is too great? Our retiree could move to Florida, save the $3,500 in taxes in New York, adopt a Go2Income plan tailored to her situation, and pay for the kids’ trips to visit her.
So be with the kids, live where you want, and maybe leave less when you die if it’s early in retirement. Conclusion: don’t follow the crowd. Do your own research. And count on the resources of Kiplinger.
At Go2Income, we can provide you with a free custom plan which offers both high starting income And more and more lifetime incomeas well as long-term savings.
President, Golden Retirement Advisors Inc.
Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. To learn more, visit Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost.