The closer you get to retirement -- and once you're there -- what gets taxed from the retirement income you'll be depending on becomes ever more important, and where you live has a lot to do with it.
So does what's meant by "retirement income" itself. Everyone's mix is different, including IRA and 401(k) distributions, interest and dividends from savings and investments, and private and public pensions, including the biggest public pension of them all.
Indeed, for many of us -- including me -- retirement income begins with Social Security, and only 10 states do tax those benefits: Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. The rules vary widely. For instance, Utah closely follows the IRS rules around income levels regardless of age, while in Colorado, Social Security is not taxed at all if you're age 65 or older.
Then it gets even more complicated. Taxes on other sources of income can vary widely variously depending on what it is, how much it is, where you live, and how old you are. (That said, there are eight states that have no income tax at all regardless of age: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.)
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Taxes are a big thing but not the only thing
As you look ahead, understanding how much tax you'll owe on your retirement benefits -- regardless of source -- is only one piece of the puzzle. And it is indeed a puzzle. Social Security, other defined-benefit pensions if you have any, and withdrawals from individual retirement accounts (IRAs) and 401(k)s can all be taxed differently.
You can best prepare your income strategy and minimize tax burdens, or at least rude surprises, by understanding those nuances. That may require working with a trusted financial advisor and/or tax attorney who deals with retirement planning for a living.
Some outside expertise might also help you look at all those other factors that will impact your ongoing financial picture, including paying for healthcare and regular monthly living expenses, plus travel and other enrichment, and, of course, unexpected costs.
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State of residence and state of mind
Focusing solely on taxes ignores these essential factors. But it's worth the time and effort to understand on what you'll owe and how much you'll owe on what you have coming in.
What state you live in will make a difference. But so does your state of mind. And being prepared can only help. Beyond numbers, feeling confident about your retirement income brings peace of mind and allows you to fully enjoy your golden years.
By the way, if you can live on just your Social Security benefits, there's one other small benefit. According to TurboTax, you don't typically have to file a federal return if that's your only income.
