Which State Is Best for Retirement?

With the economy in the doldrums, many people have been forced into retirement early. Many others are reexamining their retirement plans, figuring they might have to do with less. And still others think the unusual combination of low housing prices and low mortgage rates makes this a good time to shop for a retirement haven.

Whatever the reason, the retirement vision should go beyond thoughts of warm climates and lifestyles and include a hard look at how different states treat retirees financially. The friendliest states go easy on Social Security and pension income. Some places will tax your home heavily, others won’t. And some will be kinder to your heirs than others.

Florida has long been popular with retirees not just for gentle winters, but because the state does not tax income, says CCH, the tax-information company. The same policy is found in Alaska, Nevada, South Dakota, Texas, Washington and Wyoming, while New Hampshire and Tennessee tax only interest and dividends.

Tax laws vary dramatically in the other 41 states. Pennsylvania and Mississippi, for example, tax ordinary income but not pension income, while 27 states and the District of Columbia do not tax Social Security benefits. Find state policies in this set of CCH tables.

Don’t eliminate a state from your retirement list just because it taxes income. Tax rates vary widely, and state taxes are a much lighter burden than federal income and capital gains taxes, which you’ll face no matter which state you choose.

“States with among the highest maximum 2009 income taxes include California (with a maximum marginal state income tax rate of 10.55%), District of Columbia (8.5%), Hawaii (8.25%), Iowa (8.98%), Maine (8.5%), New Jersey (8.97%), Oregon (9%) and Vermont (9.5%),” CCH says.

Some of those states, however, have progressive tax systems that apply the highest rate only to the very wealthy. California, for example, reserves its 10.55% rate for people with incomes higher than $1 million. Other states are tough on just about everyone. Oregon’s 9% rate applies to singles with income more than $7,600 and couples earning more than $15,200.

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