States That Don't Tax Retirement Income
Those eight – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – don't tax wages, salaries, dividends, interest or any sort of income.
State and local governments may also tax 401(k) distributions. As with the federal government, your distributions are regular income. The tax you pay depends on the income tax rates in your state. If you live in one of the states with no income tax, then you won't need to pay any income tax on your distributions.
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.
Iowa ranks as the number one state to retire to.
Since health care is a top priority for retirees looking to move, Iowa may be a good choice as it ranks well for medical care and access. Iowa also holds lower crime rates for senior citizens.
MoneyGeek's analysis found that Wyoming is the most tax-friendly state in America, followed by Nevada, Tennessee, Florida and Alaska. States that received a grade of A all share something in common: no state income tax.
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.
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.
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 taxes twice on 401(k) withdrawals. With the 20% withholding on your distribution, you're essentially paying part of your taxes upfront.
While you may have heard at some point that Social Security is no longer taxable after 70 or some other age, this isn't the case. In reality, Social Security is taxed at any age if your income exceeds a certain level.
And while that continues to be the case in 2023, experts say older Americans shouldn't rule out places that aren't traditionally top of mind for retirement. Bankrate's latest study found that Iowa is the best state for retirement, followed by Delaware, West Virginia, Missouri and Mississippi.
Florida has regained its status as the best state for retirees in 2024. That's according to WalletHub's latest “Best and Worst States to Retire” study. In 2023, Virginia took the top spot and knocked Florida down to No. 2.
Beneficiaries are currently searching for information on How Do I Receive the $16728 Social Security Bonus? Retirees can't actually receive any kind of “bonus.” Your lifetime earnings are the basis for a calculation that the Social Security Administration (SSA) uses to calculate how much benefits you will receive.
One of the big financial factors when moving for retirement is how tax-friendly the state is. Currently, a handful of states do not have income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
An early withdrawal from a 401(k) plan typically counts as taxable income. You'll also have to pay a 10% penalty on the amount withdrawn if you're under the age of 59½.
Because the taxable amount is on the 1099-R, you can't just leave your cashed-out 401(k) proceeds off your tax return. The IRS will know and you will trigger an audit or other IRS scrutiny if you don't include it. However, there are a couple things you can do.
Follow the 3% Rule for an Average Retirement
If you are fairly confident you won't run out of money, begin by withdrawing 3% of your portfolio annually. Adjust based on inflation but keep an eye on the market, as well.
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
Cash flow management: Making monthly withdrawals allows you to treat this as a regular income. Many retirees prefer this style of cash flow over a lump sum format, as it helps with personal finance and budgeting. This is often the biggest advantage to making monthly or quarterly withdrawals.
Alaska is renowned for having the lowest tax burden among all states. With no state income tax or state sales tax, Alaskans enjoy the advantage of keeping more of their earnings.
As of 2023, nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — do not levy a state income tax.