Are States With No Income Tax the Best Places to Retire?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

When considering where you want to live in your retired years, states with no income tax have obvious appeal. But do they actually make the best places to retire? The answer will be different for every individual retiree, but factors like taxes certainly play a role in a smart retirement decision. Let's take a look at some of the financial aspects of retirement and how state income taxes affect the ideal choice for your retirement home.

State income taxes and you
As Fool contributor Dan Dzombak detailed last month, there are seven states with no income tax. Despite that shared trait, the states are otherwise very different. Most obviously, Texas, Florida, and Nevada are all warm-weather states that appeal to many retirees regardless of the tax situation. Alaska, South Dakota, and Wyoming are more attractive to those who like true winters, while Washington has a moderate climate. The states also differ vastly in terms of urban amenities. Texas and Florida have multiple large cities, while Seattle and Las Vegas dominate their respective states, and the remaining three states are largely rural.

But when you go beyond personal preferences to focus on money matters, the financial aspects of living in these states differ greatly. From a cost-of-living standpoint, Alaska is one of the most expensive states in the nation, making it more challenging for retirees on a fixed budget to make ends meet. Texas, on the other hand, ranks among the three most desirable states in terms of cost of living, according to a CNBC study from last year. Most of the other tax-free states rank in the middle of the pack, with Washington falling on the expensive side of average.

Moreover, even if you drill down specifically at state-level taxation, income taxes only tell part of the overall story. For instance, Washington collects the most of any state in the U.S. in combined sales and excise taxes on a per-person basis, and its gasoline and cigarette taxes are in the top 10 nationally. In Florida and Texas, property and sales taxes both rank fairly high, making up lost revenue on the income side.

When paying state income taxes makes sense
By contrast, when you look beyond states with no income tax, you'll often find more appealing combinations of traits for you, both financially and from a quality-of-life standpoint. Hawaii imposes some of the heaviest taxes in the country, but it consistently earns top honors on lists of best places to retire for its broad-based appeal. Arizona typically joins Florida among favored retiree landing spots, with a top income-tax rate of 4.54% not dissuading retirees from choosing the Grand Canyon State as a retirement destination.

In addition, some states that generally charge income taxes specifically exempt retirement income from Social Security and pensions, making them more attractive for retirees who get the bulk of their income from those sources. Pennsylvania and Mississippi go even further, exempting not only Social Security and pension benefits but also distributions from IRAs and 401(k) plans.

Finally, you need to consider going where services you want are offered. For instance, health-care real-estate investment trusts Senior Housing Properties (NASDAQ: SNH  ) , LTC Properties (NYSE: LTC  ) , and Health Care REIT (NYSE: HCN  ) , which recently acquired Sunrise Senior Living, all offer facilities in various places across the nation to provide for retirees who need health-care assistance in their living arrangements. But if your particular medical needs require specialists that are concentrated in particular cities, it's far more important for your health to be close to those specialists -- even if it means paying more in taxes.

Making the smart choice
In deciding where you want to live in your retirement years, states with no income tax are definitely worth considering. But you shouldn't ignore other important factors, both financial and otherwise. After all, you'll only retire once, and so it's important to make the most of the opportunity.

To retire with enough wealth not to have to worry about taxes, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

Read/Post Comments (8) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2013, at 10:20 AM, prginww wrote:

    Dan; Very good article.

    I think you touched upon the factors I've been considering for the past 10 years as I approach retirement. Reading some the articles which focus on taxes, weather or whatever can be frustrating.

    Reading some of the articles about "best places to retire" is somewhat like the "Callan periodic table of investment returns." Some locations seem to frequently make it to the chart, but the rankings change from year to year.

    I've built a list of priorities with "most important" at the top and "least important" on the bottom. The spouse and I score these with a weighting so that the highest score is applied to the most important items. I score twice. Once is linearly (like 1 to 10) and the second is a non-linear weighing so differences show up readily. I chart these.

    We also have a few qualities which we rank as a "zero" which is "don't care." We may decide these are important at some future date and we can then begin ranking them. For example, "being near or on water" would be lovely, but it currently gets a zero.

    Our list includes personal factors which range from "cost of living,""weather" and "water for living" to "things to do," "outdoor activities" and "location stability."

    We've decided that one thing to consider is the availability of water, which it seems may be on a trajectory to become more valuable than oil.

    Weather is also a consideration. I have an aversion to hurricanes having experienced a really bad one; that left a useful and indelible memory and so I left NOLA about 24 hours before Katrina hit.

    We've traveled to WY, WI, MI, OR, WY, CA, UT, AZ, TX, TN, NM, FL to name a few looking into the options. I'm a "do your research" and then walk the location and scope out the territory kind of person.

    One thing about a retirement relocation, or snow-birding is that purchasing something today may seem attractive, but with the fiscal situation in many states choosing based upon one factor such as state income taxes is like buying a stock because one likes a single product made by that company.

    A good example is Illinois, which has become well publicized recently for its terrible finances. However, that state income tax was low and increased about 67% a few years ago.

    It's time to review the chart with my spouse and talk about it again. But we're both in "crunch time" here so it won't happen until June.

  • Report this Comment On May 21, 2013, at 11:09 PM, prginww wrote:

    If you have a pension, New York State, which has an income tax has a $20,000 exemption for private pensions and a full exemption for state, municipal and federal pensions. Many places in upstate New York are nice places to retire. The fly in the ointment is the menace of fracking which threatens a good portion of upstate rural NY with industrialization and poisoned air and water. If the state government does the right thing and bans it statewide, NY is a great place to retire.

  • Report this Comment On May 22, 2013, at 1:44 PM, prginww wrote:

    Don't forget the great work Amanda and Robert do over at the Rule Your Retirement newsletter. At some point in their lives everyone would benefit from learning what they have to say!


  • Report this Comment On May 26, 2013, at 1:06 PM, prginww wrote:

    There are nine states without income taxes: TX, TN, WA, WY, NV, NH, AK, FL, SD.

  • Report this Comment On May 26, 2013, at 11:10 PM, prginww wrote:

    I just wanted to add that you forgot a few States maybe you had a reason.

  • Report this Comment On May 27, 2013, at 8:06 PM, prginww wrote:

    New Hampshire has no income tax on wages or on pensions...good for retirees.

  • Report this Comment On July 12, 2013, at 9:10 PM, prginww wrote:

    Anybody thinking about coming to Florida needs to be aware that the homeowners insurance industry is getting out of here as fast as it can. If you live anywhere near the coast, you are going to find yourself dealing with teeny-tiny companies you've never heard of with no track record to speak of, or you'll be trying to sign on with the largest company in the state, state-sponsored Citizens. The state legislature is trying to get the state out of the insurance business. Their latest try was to do it by dumping thousands of Citizens customers onto these companies' rosters without notice; customers found out when they opened their bills and saw a new logo on the bill with a 100% - 150% premium increase. If you live farther inland, you might still be able to do business with State Farm or Nationwide, the 2 "name" companies that are still here, but you will pay dearly. My premiums are nearly double what my relatives in TN and NC pay - we're all with the same company - and it would be even higher if I didn't have extra-high deductibles, was not in a flood zone and hadn't opted out of the sinkhole coverage. And that's just homeowners; I'm not even going near the fact that Florida's auto insurance rates are also some of the highest in the US. When I do the math, all that far outweighs the dubious benefits of not having a state income tax. That's why I crack up when I see those rankings that put the states without state income taxes at the top of "Places to Retires" like it's the be-all and end-all. There are so many other factors to consider.

  • Report this Comment On July 12, 2014, at 2:03 PM, prginww wrote:

    I wish there was a algorithm that ranked the states with all the financial factors regardless of weather. This would include state income tax, sales tax , gasoline tax, homeowners insurance to name a few. I agree the rankings usually published only have one or maybe two factors.

    The study referenced was for the best state to do business.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2431911, ~/Articles/ArticleHandler.aspx, 10/22/2016 12:12:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 hours ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:02 PM
HCN $70.50 Down -0.38 -0.54%
Welltower CAPS Rating: ****
LTC $50.65 Down -0.09 -0.18%
LTC Properties CAPS Rating: *****
SNH $21.45 Down -0.21 -0.97%
Senior Housing Pro… CAPS Rating: *****