Alright, let's get started. Welcome to today's live chat about federal and state taxes in retirement.
We have two editors of Kiplinger's Retirement Report joining us today: Editor Susan Garland and Managing Editor Rachel Sheedy
Thanks for being here, Rachel and Susan
Hi...Glad to be here, and look forward to your questions...
There are, of course, the basics -- income tax, sales tax and property tax. Preretirees and retirees should also consider, though, the types of income they will have in retirement. Thirty-six states don't tax Social Security benefits, for instance. Some states will exempt traditional pensions, but not IRA or 401(k) distributions. But other states do have such exemptions for IRA and 401(k) money.
Some retirees may also want to factor in estate or inheritance taxes. Twenty-two states have either one of these taxes, or both.
So, in many cases, in depends on the individual.
A lot depends on the type of wealth you have or how you spend your money. If your retirement income is low but you are moving to a lovely--and high-value--retirement home, property taxes may become more important than income taxes. You need to weigh a number of factors.
Yes, it can depend a lot on an individual's situation.
Would you recommend that preretirees meet with a tax--planning expert or financial planner to help them weigh all these factors?
Let's say you're thinking of buying an expensive boat for your new waterfront home, which is located in a state with a high sales tax. If you live in a state with low sales tax, perhaps it may be better to buy it now and haul it.
That's a good example, thanks Susan.
Our Retiree Tax Map looks at tax information on a state level, but the tax situation can vary greatly within a state as well when it comes to property taxes and sales taxes. So you need to consider local taxes, too, in addition to state and federal taxes.
That's a good point, Rachel.
A retiree should meet with a financial expert, especially if you are moving to a different state with different estate laws. As you can see from the map, different states tax estates and inheritances differently. Some don't have an estate tax at all, while others impose fairly high taxes. An estate plan created for one state may not protect your heirs in another state.
Alright, let's go ahead and get started with our first question from SURFERGIN
Sounds quite complicated, Susan!
Financial moves such as making a Roth conversion can also be affected by location. Say you live in a state with an income tax, but will move to one with no income tax for retirement. Do a Roth conversion in your current state and you'll pay state tax on that money. Wait til you move, and you wouldn't pay any state tax on that conversion.
In other words, there's a lot of planning that must go into a retiree's tax strategy.
Surfergin, a lot depends on your tax rate and the size of your IRA. There is nothing wrong with taking money from your IRA first (we have a story on our Web site on why this could be a good idea!). For one thing, you can take money from your IRA up to the size of your tax deductions, and that will give you tax-free money. Also, it could reduce the size of your future IRA and reduce your required distributions after age 70 1/2. But it's also nice to allow the tax-deferred pot to grow.
Alright, here's our next question from RL.
Duffer, we'll get to your question next.
There are techniques to pass on holdings while reducing your tax bite. Family limited partnerships could be one way. But whether it's an FLP or a generation-skipping trust, it's all very complicated. I would see an estate planning lawyer and get some advice.
Alright, here's the next question from Duffer.
Hi, Duffer, it could make sense...and that story we linked to on the New Rule of Thumb talks about this. But essentially, if he has some tax breaks that would go to waste otherwise, he could take out an amount that would equal those unused deductions and exemptions.
But he should be careful about withdrawing more than he needs. If he withdraws the money and spends it, he could face trouble down the road.
Thanks, Rachel and Susan. Here's our next question from Mike B
That is a risk. Though just because you withdraw money from an IRA for an RMD or otherwise, doesn't mean you have to spend the money. It could be reinvested.
That's a good point, Rachel.
Of course. And if he has stocks or mutual funds, he can transfer the securities "in kind" to a taxable account. But if the money stays in the IRA, he won't be paying tax on any interest growth until he withdraws the money. If he moves it to a taxable account, there could be a tax bite.You had mentioned CDs--there would be tax on the interest (small, I'm sure), but it would be something.
Yes, all of that has to be considered. With CDs, you also would want to try to avoid cracking into them early so as to avoid any early-withdrawal penalties.
Another good point, Rachel.