Episode 52: Why Zero Income Tax Doesn’t Mean Zero Financial Surprises

Hosts: Madison Demora and Mike Garry

Episode Overview

In this episode of Not Just Numbers, Madison and Mike break down a recent Wall Street Journal article that challenges the popular belief that moving to a no-income-tax state guarantees retirement savings. From skyrocketing insurance costs to hidden fees and property taxes, Mike explains why retirees need to think beyond just income tax rates when relocating. Learn how financial strategies like Roth conversions can help reduce state-level tax burdens, and why every move should come with a full cost-of-living analysis. Don’t pack your bags without tuning in first.Link to WSJ article mentioned in this episode https://www.wsj.com/personal-finance/taxes/retirement-low-tax-rate-states-move-cabdb31b

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TIMESTAMPS
00:08 – 02:12 – Introduction to episode topic: Why Zero Income Tax Doesn’t Mean Zero Financial Surprises
02:13 – 04:30 – Analyzing the True Cost of Relocation in Retirement
04:31 – 05:28 – Income Tax Compared to Other Cost of Living When Choosing a Retirement Destination
05:29 – 06:32 – Tax Planning Tips Before You Move
06:33 – 07:54 – How Roth Conversions Can Reduce Long-Term Tax Liability at the State Level
07:55 – 09:30 – Understanding State Taxes on Social Security and Retirement Income
09:31 – 10:48 – Estate and Inheritance Taxes: What to Know Before Relocating

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Episode Glossary

  • State Income Tax: An income tax levied by an individual U.S. state. Some states have no income tax, while others have low or high rates depending on their policies.
  • Estate Tax: A tax on the transfer of the estate (property, money, assets) of a deceased person. The federal government and some states levy this tax.
  • Inheritance Tax: A state-level tax that beneficiaries must pay when they inherit assets. Unlike the estate tax, it’s based on the value of what the heir receives.
  • Probate: The legal process of validating a deceased person’s will and distributing their estate. Some states have higher probate costs than others.
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Key Takeaways

  • Look beyond income tax savings: Moving to a no-income-tax state (e.g., Florida) may not save money due to higher property taxes, insurance, and home prices.
  • Consider all costs: Evaluate property taxes, sales taxes, and insurance (especially in hurricane-prone areas) alongside income tax rates before relocating.
  • Tailor decisions to income level: High earners (e.g., hedge fund managers) benefit more from low income tax, while middle-income retirees face bigger impacts from other costs.
  • Use Roth conversions strategically: Convert IRA funds to Roth accounts in a no-tax state (e.g., Pennsylvania) before moving to a taxed state to reduce future tax liability.
  • Research state tax rules: Check how states tax Social Security, pensions, and retirement income, and watch for hidden costs like reset property taxes or probate fees.
  • Plan for estate taxes: Consider state inheritance or estate taxes and use tools like revocable living trusts to manage asset transfers and avoid probate surprises.

Transcript

Podcast Transcript: Ep. 52 – Retirees Moving to Lower Tax States

Table of Contents

Introduction

Madison: Hello everyone and welcome to Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora and I’m here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer and his law firm is Yardley Estate Planning. Hey, Mike.

Mike: Hey, Maddie. How are you?

Madison: Great, great. How are you doing today?

Mike: Good, good. Rainy Tuesday.

Madison: Yeah. One day away from our client event. Pretty exciting.

Mike: Pretty exciting. Can’t wait for that.

Madison: Yes, yes, me too.

Article Summary: Retirees Who Move to Lower Tax States

Madison: All right, so today we are going to discuss a article from the Wall Street Journal and it is titled “Retirees Who Move to Lower Tax States May not Save as Much as They Think”. And this is by Debbie Carlson. Many retirees move to states with no income tax, thinking it will save them money, but other costs often offset the savings. A couple who moved from Indianapolis to Florida found that higher home prices, insurance, and hurricane repairs made the financial benefit of no income tax negligible. The lesson is not to focus solely on income taxes when considering relocation. For retirees, middle-income earners are often more affected by property and sales taxes, which can be higher in states without income tax. Insurance costs, especially in areas prone to extreme weather, can also be significant. Financial planning like Roth conversions, can help reduce tax burdens, and it’s important to consider how a state taxes retirement income and estate inheritance. Ultimately, retirees should consider all costs, not just taxes, and use tools to compare cost of living and purchasing power before making a move.

Weighing Pros and Cons of Relocating for Tax Reasons

Madison: All right, Mike, how do you help clients weigh the pros and cons of relocating for tax reasons in retirement?

Mike: Yeah, I mean, I think the summary did a good job. Your summary did a good job of explaining that we get a lot of people around here who think about moving somewhere that is a 0% income tax state and you know, think about the difference in, in where they live. And you know, we’re in Pennsylvania, which has a reasonably low flat state tax. Right. It’s 3.07%. But we’re near New York, New Jersey, Connecticut that all have progressive and higher income tax rates. And so, you know, if you’re paying 10 or 12% in your state income tax and another state is offering 0%, it could be pretty compelling. But I think what really matters is all of the costs that go into it. For years here in the Northeast, people looked at the Southeast as a inexpensive place to live with lower tax burden and lower cost of living. And I’m sure that that was true for a long time. And what I’m guessing

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