By Faron Daugs
Everyone has that dream for retirement. Moving to that perfect place where you can spend your carefree days. Maybe it’s lounging at the beach all day or hitting the slopes. No matter how you want to spend your retirement, if you’re moving out of state there are several factors to consider before relocating.
If you’re near or at retirement, you might be looking to downsize your current living situation and leverage that extra money to utilize for retirement income. But when it comes to taxes, cost of living, and even healthcare, you’ll need to be aware and prepared before you make that move.
If you don’t know where to start, here are a few simple steps you can take to prepare yourself for retirement, moving out of state or simply downsizing.
Taxes are typically one of your biggest expenses in retirement, so the goal is to minimize them as much as possible. Some taxes will always impact you—such as federal, capital gains, taxes on interest and dividends. You will also be subject to taxes on distributions from your traditional 401(k) or company retirement plans; however, you can exercise some control over taxes depending on where you move.
The 2017 Tax Cuts and Jobs Act capped state and local tax deductions, including property taxes, at $10,000. Those living or looking to move to a high-tax state such as California might not be able to deduct 100% of their state and property taxes on their federal returns.
Furthermore, eight states don’t tax personal income, which could benefit someone looking to reduce their month-to-month retirement expenses. But for states that do tax income, it’s not all equal. Some might not tax income but the interest from income. Others might exclude pension payments and retirement plan distributions.
Another important consideration is estate or inheritance taxes . Thirty-three states don’t have these kinds of taxes, so this is something to certainly consider when looking to relocate.
If you are moving internationally, keep in mind that you will still have to file a tax return in the United States as well as a return in the country you reside; however, you might qualify for the Foreign Earned Income Tax Exclusion or the Foreign Tax Credit.
Remember that federal taxes are almost always higher than state taxes. Reducing any federal taxes might offset local taxes depending on where you relocate.
2. Cost of living
Lower property taxes or no income tax can seem enticing, but don’t look at your finances solely in terms of taxes. You’ll need to look at the overall cost of living in the area and trends over the next five, 10 or 15 years. Markets experiencing higher than average inflation now might reflect higher cost of living in the future. This includes everything from utilities to groceries to healthcare.
Housing costs are also rising rapidly in low tax burden states. When downsizing, you’ll need to be thoughtful about how much house you’ll really need and the location. Can you relocate to where you want and still be comfortable through retirement?