How Bad Is California for Taxes in Retirement?

When you're living on a fixed income, every dollar matters. Retirees often find themselves looking harder at expenses they once overlooked, and taxes can quickly become one of the biggest line items. For those thinking about where to settle down, the question isn't just about sunshine or scenery. It's about whether the state will stretch or strain your retirement budget.

That's why California's reputation stands out. It's famous for its beaches, mountains, and enviable climate, but equally infamous for its high taxes. If you're planning for retirement, it's worth taking a closer look at how California treats retirees' wallets.

California's income tax rates and retirement income

California is home to the highest state income tax rates in the nation, topping out at 13.3% for the highest earners. Even those with more modest incomes can feel the pinch, as rates start at 1% and climb quickly.

For retirees, this means that withdrawals from traditional retirement accounts, like 401(k)s, IRAs, or pensions, are subject to state income tax. For example:

• A retiree withdrawing $40,000 annually from a 401(k) could owe around $1,000–$2,000 in state income taxes, depending on other income.
• Those with higher pension payouts or large required minimum distributions (RMDs) may see their tax bills rise substantially.
• Annuity payments are also taxable as ordinary income.

This stands in contrast to states like Florida, where such retirement income isn't taxed at all. For many retirees, that difference adds up year after year.

The exception: Social Security benefits

Here's the good news: California does not tax Social Security benefits. That makes it one of the majority of states that exempt these payments entirely.

If Social Security is your primary income source, California may not be as harsh as its reputation suggests. For instance, a retiree receiving $25,000 per year in Social Security benefits and drawing only minimal savings could owe little to nothing in state income tax.

However, most retirees rely on a mix of Social Security and other income, which means California's broader tax structure often still comes into play.

Sales and property taxes add to the mix

Income tax is only part of the story. California also carries one of the highest state sales tax rates at 7.25%. Local jurisdictions often tack on additional percentages, pushing totals above 10% in some cities. That means groceries, clothing, and other daily purchases might consistently cost more.

Property taxes, by contrast, are often misunderstood. California's average property tax rate is relatively low at around 0.7% of assessed value, thanks to Proposition 13, which caps annual increases. The catch? Property values themselves are much higher than in most states. A $700,000 home in Los Angeles with a 0.7% tax rate still results in a $4,900 annual bill, higher than the taxes on a similarly sized home in many parts of Texas or Florida.

Local differences can also matter. Some counties are markedly more affordable than others, meaning retirees need to factor in not just the state average, but the neighborhood they choose.

How California compares to tax-friendly states

It's no secret that Florida, Texas, and other states market themselves as retirement havens. They have no state income tax, which means pensions and 401(k) withdrawals are untouched. Pair that with generally lower housing costs, and the tax savings can look substantial.

But the tradeoff isn't always straightforward. Florida and Texas often have higher property tax rates, which could outweigh the income tax savings depending on your home value.

For example, a retiree in Texas might pay no income tax but face property taxes exceeding 1.5% of home value. In California, despite high home prices, Proposition 13 ensures property tax increases are capped, which can help long-term homeowners.

The bottom line: moving to a tax-friendly state isn't automatically cheaper. It depends on your mix of income sources and housing costs.

Mitigating factors for retirees in California

Despite its reputation, California does offer some breaks. Proposition 13 caps property tax increases, keeping long-time homeowners' bills relatively stable. Seniors may qualify for certain property tax exemptions, including reductions for disabled veterans or low-income households. The state also allows deductions for some medical expenses, which can grow in retirement.

These policies don't erase the impact of high income tax rates, but they can soften the blow for specific households.

Who might find California affordable in retirement?

California can be challenging for retirees with large pensions or heavy reliance on taxable retirement withdrawals. On the other hand, retirees whose income is primarily from Social Security, or who bought their homes decades ago, may find the tax burden more manageable than expected.

Ultimately, the decision comes down to your retirement plan. If your savings strategy left you with significant taxable income, California may feel costly compared to Florida or Texas. But if your income is modest and you value the lifestyle, climate, and proximity to family, the tradeoff might still be worthwhile.

Bottom line

California's tax system can look unfriendly on paper, especially compared with no-income-tax states. High rates on retirement account withdrawals and everyday sales taxes are real considerations. Yet, Social Security exemptions, property tax caps, and certain deductions keep the picture from being entirely one-sided.

So, is California "bad" for taxes in retirement? For some, yes. For others, the state's natural beauty and long-term stability of property taxes make it a viable option. The real question isn't whether California is good or bad, but whether it fits the way you've structured your retirement plan.