Eight states do not impose a personal income tax, meaning retirement income from any source remains untaxed. These states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Key Takeaways
Illinois, Iowa, Mississippi, and Pennsylvania are considered to be the most tax-friendly states for retirees. 38 states don't tax Social Security income. 29 states don't tax most military retirement pay.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
If you withdraw from your 401(k) before you reach age 59½, you may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that you must include in income. The 10% tax will not apply to distributions before age 59½ if you qualify for an exemption.
As a general rule, if you withdraw funds before age 59 ½, you'll trigger an IRS tax penalty of 10%. The good news is that there's a way to take your distributions a few years early without incurring this penalty. This is known as the rule of 55.
The $1,000 per month rule is designed to help you estimate the amount of savings required to generate a steady monthly income during retirement. According to this rule, for every $240,000 you save, you can withdraw $1,000 per month if you stick to a 5% annual withdrawal rate.
The easiest way to borrow from your 401(k) without owing any taxes is to roll over the funds into a new retirement account. You may do this when, for instance, you leave a job and are moving funds from your former employer's 401(k) plan into one sponsored by your new employer.
With only a few exceptions, your 401(k) distributions are subject to a mandatory 20% withholding. Money withheld from your distributions applies toward your tax bill, similar to paycheck withholding when you're working a job.
Do you pay taxes twice on 401(k) withdrawals? We see this question on occasion and understand why it may seem this way. But, no, you don't pay income tax twice on 401(k) withdrawals. With the 20% withholding on your distribution, you're essentially paying part of your taxes upfront.
If a 401(k) plan participant withdraws funds from their plan before age 59½, they would be subject to a 10 percent early withdrawal penalty from the IRS. In California, taking early distributions from a 401(k) also means incurring an additional state tax.
Ultimately, this comes down to the choice that's best for your finances. Your money has the most potential for growth if you take your entire minimum distribution at the end of each calendar year. But personal budgeting may be easiest if you take your minimum distribution in 12 monthly portions.
Take Out a 401(k) Loan
Your 401(k) plan may permit you to take out a 401(k) loan and forgo the income taxes and penalty associated with an early withdrawal. While you'll be required to repay the loan with interest within five years, you'll be repaying yourself.
Standard Deductions for Retirees
The standard deductions for 2024 are $14,600 for single taxpayers and married taxpayers filing separately, $29,200 for married taxpayers filing jointly, and $21,900 for heads of household. You won't owe any taxes if your taxable total income falls below these amounts.
A: The best state to retire in 2024 is sunny Florida, thanks to its relative affordability and high quality of life for seniors. That's followed by Colorado, Virginia, and Delaware. Q: What state has the lowest cost of living for retirees? A: Alabama ranks as the most affordable state to retire in.
You can take tax-free distributions from a Roth 401(k) tax-free if you're 59½ or older and it's been at least five years since your first deposit into the account. You already paid taxes on those contributions at the time you made them with a Roth account.
Beneficiaries can avoid taxes on a Roth 401(k) inheritance as long as the account holder began making contributions to the account at least five years before the beneficiary started taking withdrawals. For the 2024 tax year and beyond, RMDs aren't required from designated Roth accounts .
There are several approaches you can take. A traditional approach is to withdraw first from taxable accounts, then tax-deferred accounts, and finally Roth accounts where withdrawals are tax free. The goal is to allow tax-deferred assets the opportunity to grow over more time.
Since Jan. 1, 2024, however, a new IRS rule allows retirement plan owners to withdraw up to $1,000 for unspecified personal or family emergency expenses, penalty-free, if their plan allows.
Income taxes, a 10% federal penalty tax for early distribution, and state taxes could leave you with barely over half of your original amount, depending on your situation. Need an alternative to cashing out your 401(k)?
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000.
You can retire comfortably on $3,000 a month in retirement income by choosing to retire in a place with a cost of living that matches your financial resources. Housing cost is the key factor since it's both the largest component of retiree budgets and the household cost that varies most according to geography.
Probably 1 in every 20 families have a net worth exceeding $3 Million, but most people's net worth is their homes, cars, boats, and only 10% is in savings, so you would typically have to have a net worth of $30 million, which is 1 in every 1000 families.