How The State You Live In Can Affect Your 401k

We’ve covered a lot of ground with regard to how various tax laws impact your retirement plans: pensions, IRAs, 403(b) and 401(k) plans.  But we’ve primarily focused on the US income tax laws (the IRS) affect your plans – and there are many nuances that you need to take into account with regard to state tax laws.

State Tax

The big deal with state tax laws and retirement plans is that some states have special tax deals for money inside of retirement plans.  If you happen to live in (or are planning to move to) such a state, it makes good sense to understand any special nuances in the tax laws before doing anything.

This is due to the fact that, for example, it could make a huge difference in the tax impact if you cashed out a plan in one state versus another.  Here in Illinois, there is no state tax on retirement income – whether from a pension plan, from an IRA or from a 401(k).  The same is true for Hawaii, Illinois, Kentucky, Mississippi and Pennsylvania.  So if you are planning to move to Kentucky (for example) for retirement – it would pay off if you wait until you move to your new home before withdrawing IRA assets, especially if you’re moving from somewhere with a high state income tax.

In addition, certain states also provide exemption from estate tax for assets held in retirement plans (Ohio, Oklahoma, Kentucky, and Pennsylvania).

Moving Money

Not only should you know the state tax laws for taking distributions from your retirement plans, it may also be important to know the state tax laws for the various types of plans.  Here are a couple of examples:

  • Alabama exempted tax on defined benefit retirement plans, but not on other types of retirement plans
  • Maryland exempted Keogh plan distributions from income tax, but not distributions from other types of retirement plans.

So pay attention to, and get acquainted with, the tax laws in your state and any states you’re considering for a new home (either in retirement or at another time in your life) so that you don’t miss out on any tax treatment – or worse, make a move that precludes some tax treatment from being available.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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2 Comments

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  • Keith,

    I believe that Wisconsin taxes your income at the source, so if the 401(k) is based there, you’ll have to file a Wisconsin return for it. The same goes for a federal return for each year that you take distributions from the 401(k).

    jb

  • I live in Wisconsin and I’m thinking to retire to The Philippines. I’ve earned all my 401k money while working in Wisconsin. Can you tell me of the taxes I would have to pay if I’m living of the interest in The Philippines. Do I have to pay Wisconsin state tax? and such

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