The state in which you retire could have a huge impact on your senior years, for better or for worse. For some seniors, the decision of where to retire boils down to things like proximity to family and climate.

But there are financial implications to consider on a state-by-state basis, as well. Here are three, in particular, to focus on as you evaluate your choices.

1. State income taxes can eat away at your nest-egg withdrawals

Just as you're liable for state taxes on your income when you hold down a job, your earnings are taxed at the state level in retirement. And by "earnings," we're largely talking about IRA or 401(k) distributions.

Map of the United States.


There are seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming -- that don't have an income tax, so if you move to one of these, you can rest assured that the money you withdraw from your retirement savings plan will only be subject to federal taxes (unless you're housing your savings in a Roth IRA or 401(k), in which case withdrawals are completely tax-free). On the other hand, California, Hawaii, New Jersey, Oregon, Minnesota, and New York have some of the highest state income tax rates in the country.

Your takeaway? See what tax rates look like for each state on your list, and use that information to help inform your decision.

2. Some states tax Social Security benefits

Chances are, Social Security will be a significant source of income for you during retirement. If it's your only source of income, you might avoid federal taxes on your benefits, but if you have other income, whether from a retirement savings plan, pension, or part-time job, you'll likely be taxed on those benefits at the federal level.

But that's not all. There are 13 states that impose a tax on Social Security income, and if you retire in one of them, you could end up losing even more of those benefits. Those states are:

  1. Colorado
  2. Connecticut
  3. Kansas
  4. Minnesota
  5. Missouri
  6. Montana
  7. Nebraska
  8. New Mexico
  9. North Dakota
  10. Rhode Island
  11. Utah
  12. Vermont
  13. West Virginia

Most of the above states do offer an income-based exemption that lets you avoid taxes on benefits if you're not a particularly high earner in retirement. But Minnesota, North Dakota, Vermont, and West Virginia offer no exemption at all, so keep that in mind as you narrow down your choices.

3. Medicare plan options vary by state

It's easy to think of Medicare as a national health program, but actually, the state you retire in could dictate the sort of coverage you get. While coverage under Parts A and B, which cover hospital and preventive care, respectively, are universal no matter where you live as a senior, Part D plan offerings can vary from state to state. Part D covers prescription drugs, and some states offer a larger variety of Part D plans -- and more affordable plans -- than others.

The same holds true if you're planning to enroll in Medicare Advantage instead of original Medicare. The cost and availability of Advantage plans can vary by state, so be sure to do some research before settling on your future home.

There are plenty of non-financial reasons to retire in one state over another, but before you make that call, be sure to keep the above points in mind. The last thing you want is an added dose of money-related stress during your senior years.