The No-Income-Tax States Retirees Love Most Are Hiding a Financial Trap Nobody Warns Them About

If you're thinking about moving to a new state as part of your overall retirement plan, you've likely considered one of the no-income-tax states. On the surface, living in one of these states may seem appealing because of the financial benefits.

However, no-income-tax states still have to charge other taxes in order to fund important services, like public schools, roads, and more. For that reason, the savings may not be as substantial as you think, depending on where you live and your personal finances. Here's what to consider if you're thinking about moving to a no-income-tax state in the future.

These are the nine no-income-tax states

The nine no-income-tax states are Florida, Texas, Nevada, Tennessee, Wyoming, South Dakota, New Hampshire, Alaska, and Washington. These states attract significant amounts of retirees who move there, assuming that they'll be able to keep more of their hard-earned money.

However, as mentioned, sometimes the math isn't that simple. Some states may waive income tax but charge residents in other ways to fund necessary government services and projects.

High property taxes can erase your tax savings

Even if a state does not charge income tax, residents may still pay high property taxes. For example, New Hampshire charges an average property tax rate of 1.50%, and Texas has an average property tax rate of around 1.40%. Depending on the value of your home, this may be a considerable annual expense to take into consideration before moving.

Sales taxes can quietly increase your retirement costs

Another tax that's easy to miss day-to-day is sales taxes, because you only feel the impact when shopping. Of course, retirees still need to purchase goods, whether that's groceries or new furniture. Some states, like Washington and Tennessee, have some of the highest combined sales tax rates in the country. For example, Washington charges 6.5% sales tax, and Tennessee's is 7%, not including local tax rates, which can push these percentages even higher.

So, even though these states don't charge residents income tax, retirees' daily expenses may be more due to high sales taxes.

Investment taxes can also catch retirees off guard

Many retirees mistakenly think that if a state has no income taxes, they won't have to pay taxes on their investment gains. However, capital gains and income taxes may be treated differently depending on where you live.

In Washington state, there is a 7% capital gains tax on some investments, even though there is no personal income tax. For that reason, retirees who expect to have significant capital gains may fare better living in a state with no capital gains taxes, like Alaska or Nevada, among others.

High insurance and housing costs can also impact retirement savings

Another important consideration is housing costs. Many retirees pay off their mortgages before leaving work and are surprised that they still pay high housing costs due to home insurance and maintenance. Some states that have no income tax may still have high housing costs, which is an important consideration.

Florida, for example, has no state income tax. However, it has one of the highest homeowners' insurance rates in the country due to its frequent natural disasters.

Look at the total cost of living, not just income tax

Ultimately, it's wise to take the time to do your research if you're considering living in a state because of its income tax policy. That means instead of being swayed by a no-income-tax headline, take the time to research the full annual cost of living in that state. Those numbers can give you a more accurate projection of how much it will cost to live in a particular state before you relocate.

For example, Wyoming is a state with low property taxes at 0.53% on average and no income tax. It also doesn't have an estate tax or inheritance tax. It does have a 4% sales tax, but that's also low compared to other states.

Ask for financial advice if you need it

If you're not sure whether or not moving to a no-income-tax state is the best choice for you, speaking with a financial advisor could help. An advisor can look at your entire retirement portfolio and take the time to understand your goals and how long you may need your nest egg to last. From there, they can make recommendations about the best place to live based on your personal goals and retirement withdrawal strategy.

Bottom line

Many people believe that the key to a stress-free retirement is moving to a no-income-tax state as part of their overall retirement plan. While that may work for many retirees, it's still worthwhile to run the numbers before you plan to move. That's because even though some states don't charge income tax, some of their other taxes, like property tax and sales tax, may be higher.

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