By Megan Rule | Staff Writer
Although retirement isn‘t on the radar for many college students, paying attention to the effects of taxes on retirement is something that should be in the back of everyone‘s mind, as experts say state tax plays an important role in deciding where to live after a career is over.
“Save for retirement,” said Rocky Mengle, senior writer and analyst for Wolters Kluwer Tax and Accounting. “That‘s not really a tax issue, but just save for retirement. Be careful how you spend your money so that when you do reach retirement age, your state tax liability won‘t be such a large factor, and you‘ll have more flexibility to live wherever.”
Tax liability is the total amount of tax on your income, and can also include self-employment tax, household employment tax and tax penalties, according to TurboTax.
The taxability of retirement benefits varies from state to state, according to a press release from Wolters Kluwer Tax and Accounting. This means that if someone is approaching retirement age, it is important to look at tax liability, especially someone thinking about moving to another state. In the mix of weather and proximity to family and accessibility to health care, state tax liability should be a factor as well, Mengle said.
More information about various taxes and the effects of them can be found on the Wolters Kluwer website. Wolters Kluwer is a company that provides tax law information to various tax professionals, and Mengle has been in the tax publication business for nearly 20 years.
Mengle also said the taxability of retirement benefits typically comes into play when someone is thinking about moving. There are seven states that do not tax individual income, and Texas is one of the seven. The other states are Alaska, Florida, Nevada, South Dakota, Washington and Wyoming. New Hampshire and Tennessee impose a flat tax (5 percent) only on dividends and interest, according to the press release. This means interest on a bank account or dividends from investments and stock are subject to tax.
“That means that those seven states have no personal income tax whatsoever, anyone living in those states will not have an income tax requirement at the state level, but they still have to file federal returns,” Mengle said. “The other two states tax interest and dividends, so wages are not subject to the income tax.”
The other 41 states tax benefits and income in different ways. Some states exempt pension income, some states exempt Social Security income and some states tax all retirement income, according to the press release. This is important to consider because taxes can add up. It may not seem important to save for retirement now, but in the future it will pay off.
“Paying taxes is something that everyone has to learn but no one really teaches,” said Quito junior Kasey Kinzel. “Unless you take a specific course about finances, you just eventually get thrown into the real world of paying them without any guidance. Learning taxes while you are still in college and before you begin to make money in a career can simplify everything.”
Mengle said that all taxes such as sales tax, property tax and state tax should be considered when moving after retirement. They all play a role in the grand scheme of things, especially once a person retires and has limited income. Mengle said people need to understand both the type of income in addition to the income tax rate in various states a person is considering moving to. He also emphasized the importance of saving for retirement and preparing early.
“Once you‘re out and in the workforce, if a company has a 401K program, contribute to it, or contribute to IRAs or other retirement savings accounts” Mengle said. “Start early and keep putting money away; once you reach retirement age you‘ll be glad you did.”