How To Pocket Your Retirement Distributions Tax Free

You’ve worked hard all your life, now it’s time to retire, or you’re getting ready to retire. When that time comes, depending on what state you live in, you may end up having to say good bye to some of your hard earned money.

When you begin taking distributions from your IRA, 401k, or pension plan, those distributions are taxable under federal income tax and any applicable state income tax rules. While federal taxation cannot be avoided, state taxation may be avoided depending on your state of residence.

That’s right! The good news is that there are a few states that have no income tax and don’t tax retirement plan distributions. On the other hand, some states that have special exemptions for retirement plan distributions, and other states that do in fact tax retirement plan distributions.

Let’s discuss how to avoid paying taxes. (We do that a lot around here folks!)

States with no income tax.

Naturally, the easiest way you can avoid state income tax on retirement plan distributions is by living in a state that has no state income tax. Have you ever heard of “the villages” in Florida? It isn’t just the sunny beaches of Florida that helps attract all of those retirees. It’s the tax free state income treatment!
The 8 other states with no tax on retirement plan distributions are New Hampshire, Nevada, South Dakota, Texas, Washington, Tennessee, Wyoming and Alaska.

States with income tax that make an exception for your retirement distributions.

There are many states who are willing to make an exception for your retirement distribution. There are 36 states that have some sort of exemption for retirement plan distributions. Since each of these states are different, so too are their exemptions. The type of retirement account you have is what decides the exemptions available to you. Here’s a quick summary of the common exemptions found throughout the states:

  1. Public Pensions and Retirement Plans. Distributions from federal or state employer plans are exempt from taxation in many states. This is the most common exemption amongst states that have an income tax but who exempt some types of retirement plan distributions from income.

Most of the 36 states that have an exemption for retirement plan income provide an exemption for public employee pensions and retirement plans.

  1. Private Pensions and Retirement Plans. 10 states offer a full exclusion for private pensions and retirement plans. Some of them differ between pension and contributory plans, while some of them make no distinction.
  2. IRAs. There are some states that don’t tax any retirement pan distributions, including IRA distributions to retirees. Illinois for example does not tax distributions from retirement plans at all.

Tennessee and New Hampshire are states that do not tax wage income and therefore they do not tax retirement plan distributions of any kind. There are also numerous states that exclude a certain limit of retirement plan income from taxation. For example, Maine exempts the first $10,000 of income from any retirement plan, including IRAs.

I hope this article has helped you. Oh, and just in case you were thinking about going to the villages, they were raided for drugs recently.

 

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