Tax Friendly States

What you want to look for when you are planning what state would be best for you in retirement. It is very important that you look into what that state’s Income Tax rates and rules are; how they treat your Social Security, Pension and Retirement Incomes; as well as what their sales and property tax rates look like.  Lastly it would be good to keep in mind if the state you want to live in has any Estate or Inheritance Taxes that would affect your heirs and what you leave behind for them.

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Best States To Retire In

Top 9 States For Retirement

Always Keep In Mind:

• Income Taxes
• Sales Taxes
• Property Taxes
• Estate/Inheritance Taxes

Top States:

• Alaska
• Wyoming
• Texas
• New Hampshire
• Delaware
• Georgia
• Alabama
• South Carolina
• Colorado

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The other day Peter and I ordered breakfast from McDonalds, and we were saddened by the woman who took our order. She was a sweet old lady about 85 years of age. “Why is this woman still working?” I thought to myself. Perhaps she was bored in retirement, maybe she was lonely or worse yet, maybe she was part of the 62% of Americans who retire with less than $25,000 in assets and completely dependent on Social Security and Medicare for support. I don’t know this particular woman’s circumstances, but with the growing number of elderly people working at fast food joints or as “greeters” at Wal-Mart, it is abundantly clear that depending on social security and Medicare is not going to provide enough to support you in retirement. The bad news is that Social Security is expected to run out of money by 2030, long before any of us millennial’s even reach retirement age to collect social security.

The best way to ensure financial security in your golden years is to start saving for retirement as early as possible. Even starting with as little as $50 per month will add up quickly. When setting up a retirement strategy, make sure you cover the 4 bases of retirement planning for financial security.

1. Set up a Tax Exempt Account

It is a certainty that taxes will increase in the United States. Part of your retirement strategy should be to invest money in a tax exempt account such as a ROTH IRA, which will allow you to withdraw funds at retirement age( age 59 1/2) tax free. Peter and I opened our ROTH IRA’s withbecause of the very low commission fees per trade and the user –friendly trading platform. We invest in dividend paying stocks in our ROTH IRA and set up the account for a dividend reinvestment plan. The way this plan works is that any dividends we receive from our stock holdings are used to purchase additional shares of the underlying stock and best of all this service is automatic and it’s free. It’s like using compounding interest to your advantage; you purchase a stock that pays dividends, you use those proceeds to buy more stock which will then pay you more dividends. Once you reach retirement age and begin withdrawing funds, all money received is tax free. For 2011, the maximum contribution amount for a ROTH IRA is $5,000, but even if you can’t afford to fund $5,000, any amount is better than nothing.

2. Set up a Tax deferred Account

The next area of our retirement strategy focuses on the tax deferred account, such as a 401(K), Traditional IRA, SEP IRA , and 403(b). These types of accounts are funded with pre-tax dollars and the money grows tax free until disbursements begin in retirement. The best way to make good use of this type of account is to contribute enough money to receive the full company match offered by your employer. It’s like receiving free money. The down side to tax deferred accounts is that when the money is withdrawn, it is taxed at earned income levels, which is the highest form of income taxes in the United States.

3. Set up a Taxable Account

Peter and I also invest money through our brokerage account, such as those offered by. This type of account doesn’t have any obvious tax advantages, since money is invested using after tax dollars and any realized gains are taxable. However, if you invest long term, defined as owning a security longer than 1 year, you receive favorable tax treatment. Any realized gains on long term investments are taxed at a much lower tax rate of 10 – 15%, depending on the tax bracket you’re in. Any dividends earned in this account are also taxed at this lower rate. While you do have to pay taxes on the gains the year those gains are realized, the tax is much lower than for traditional IRA’s and 401 (k)’s, which are taxed at earned income tax levels (taxes anywhere from 10% up to 35%, depending on your tax bracket).

4. Invest in Guaranteed Income Products

Some people enjoy the security of having a guaranteed amount of money coming in every month. One such investment that provides guaranteed income is an annuity. A creative way to fund an annuity is to use a cash value life insurance policy and use a 1035 exchange. For example, let’s say you own a whole life insurance policy with a cash value of $100,000 and you’ve reached retirement age and no longer feel that you need the life insurance. You can use a 1035 exchange life insurance to annuity, which will allow you to use the cash from your whole life insurance policy to fund the annuity without triggering a taxable event. You would then earn a guaranteed amount of money for life, regardless of how long you live. However, a portion of the monthly income you receive is subject to earned income tax rates, and this amount is calculated by taking the amount of the investment, dividing it by the amount expected to be received based on life expectancy tables) and multiplying this ratio by the monthly payment. Your insurance agent will be able to tell you how much of your annuity payments are subject to income taxes.

This simple four step plan will help put you on the right path to creating long term Wealth and ensure a comfortable and financially secure retirement.

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