Why Retiring in Iowa Might Make You Richer Than Florida (Seriously) - Part 1 of 2

Speaker 1 There's no universal best or worst state for retirees. There's only your best state, the one that makes the most sense once you add up all the numbers, not just the ones on the welcome sign.

Speaker 1 What matters is your effective tax rate, what you actually pay after exemptions, deductions, and all the little quirks that the tax code hides in plain sight.

Speaker 1 And for retirees, those quirks can become enormous.

Speaker 1 Hello friends, this is Tyler Gardner welcoming you to another episode of your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing.

Speaker 1 So let's get started and get you one step closer to where you need to be.

Speaker 1 When thinking about where to retire, or where to legally pretend you're evading taxes for the rest of your life, everyone and their cousin will tell you to move to Florida or Texas.

Speaker 1 And I'm not going to lie, once I started making a few dollars here and there, the first two states I looked into for property were, surprise, Florida and Texas.

Speaker 1 But what if I told you that, in some cases, moving to Iowa, yes, Iowa, could actually leave you with way more money in retirement than living in a so-called no-tax paradise?

Speaker 1 I know, sounds like the setup to a bad joke. A retiree walks into a cornfield and comes out with way more more money.
But this episode, this whole two-parter, is about the great tax mirage.

Speaker 1 The myth that no income tax states are automatically better for retirees. If you don't want to listen to the rest of the show, all you need to really know is this.
They're not.

Speaker 1 In fact, in some cases, they're the exact opposite. And if you're the kind of person who's ever been told, just move south, you're going to save a fortune, this episode's for you.

Speaker 1 Because it's like my older and far wiser brother once told me when I was contemplating moving across the river to New Hampshire just to save on income tax.

Speaker 1 Every single state will find its way to get revenue from you. And a tax by any other name is still, well, a tax.

Speaker 1 So today, we're going to unpack why no income tax might actually be the most expensive lie in retirement planning.

Speaker 1 And how, depending on how you withdraw your money, you could end up paying less tax living in New Jersey than living in Florida. Yeah, Jersey.
The place where people flee from like it's on fire.

Speaker 1 I'm allowed to say that. I have a friend who lives in New Jersey and he has granted me permission.

Speaker 1 Now, at the end of this episode, I will share what this really means for you, how to think about where you live in retirement, and why taxes are just one piece of the puzzle.

Speaker 1 And next week, in part two, we'll name some more names. We'll even rank the top five best and worst states for retirees when it comes to taxes.

Speaker 1 And I'll even show you how being married could save you six full percentage points on your ultimate tax bill. But first, we're going to start with the basics.
Why does this even matter?

Speaker 1 But as always, before we get into it, if you're enjoying the show, it would mean a lot if you left a quick review on Apple Podcasts or Spotify.

Speaker 1 or shared it with a friend who still thinks that no state income tax means that they get to keep their entire adjusted gross income for life.

Speaker 1 It helps new listeners find the show and lets me know that these hours of tax humor, or what I call tax humor, are somehow not going to waste.

Speaker 1 So, today, let's start here.

Speaker 1 Picture this, and I'll bet many of you can. You've just spent 40 years working for the metaphorical man.
Whatever that may mean to you, you've been saving.

Speaker 1 and daydreaming of the day when the hardest decision you'll have to make is whether to golf before lunch or after, and whether you'll join friends in Condo 5C for cocktail hour at 3.30 p.m.

Speaker 1 or wait to arrive fashionably late at 4 p.m.

Speaker 1 And you know what? You've earned that. You've done the hard part.

Speaker 1 But before you sell the house, buy the RV and post the we're moving south and never paying the government another dime photo on Facebook, it's worth asking one deeply unsexy question.

Speaker 1 What will actually happen to our nest egg after we move? Because here's the part no realtor in Naples, Florida, or Fort Worth, Texas will ever mention.

Speaker 1 Every state takes a bite out of your retirement differently. Some just use different utensils.

Speaker 1 Now, as I will always give credit where credit is due, none of the following is my original work or research.

Speaker 1 Except for the ill-timed, long-winded, and often unnecessary jokes and digressions, the following is brought to you by a study run by Fidelity, a fascinating study that they ran just this past year.

Speaker 1 They modeled what happens when a retiree withdraws $100,000 a year from their IRA, factoring in both state and federal taxes, and the results were not what you'd expect.

Speaker 1 At the very least, they certainly were not what I would expect.

Speaker 1 And the difference between your retiring in a so-called high-tax state and a low-tax one could mean thousands of dollars a year and tens of thousands over a decade. So let's start by making this real.

Speaker 1 Imagine you and your spouse retire to Oregon. You'd pay an effective tax rate close to 13%.

Speaker 1 Move to Iowa, however, and that number drops to around 7.5%.

Speaker 1 That's over a 5% gap.

Speaker 1 Now, if you were to invest that difference over 10 years at a modest 7% return, you've just found yourself roughly $73,000 richer, enough for a small boat or a very large collection of bird feeders, depending on how much you enjoy arguing with squirrels or trying to find a cool spot for a boat in Iowa.

Speaker 1 But here's why I'm bringing these numbers to your attention.

Speaker 1 Most people never even look at these numbers or consider them this way, and those who do tend to stop their exploration at whether or not there is state income tax.

Speaker 1 I want us to start practicing calculating and looking at the effective tax rate that we will pay if we're going to move somewhere, which is simply our total tax liability divided by our total income.

Speaker 1 There's nothing marginal about this. By looking at effective tax rates, we can begin to compare apples to apples.

Speaker 1 Because if we're just looking at certain elements of the total tax liability, many will just assume that no income tax automatically means more money in your pocket.

Speaker 1 But the truth, the tax code is a Rorschach test for wishful thinking. You see what you want to see.
Florida on their brochures says, we have no income tax.

Speaker 1 and retirees here screw the IRS and never pay them again, which is about as accurate as saying that Spirit Airlines is cheaper than other airlines because they charge such a low fare and then charge you an additional $100 per item of clothing you choose to wear on the actual plane.

Speaker 1 When you dig into the math, you start to see the marketing mirage.

Speaker 1 Sure, Florida doesn't have a state income tax, but property taxes, insurance costs, and sales taxes all quietly nibble at your retirement like mosquitoes at a picnic.

Speaker 1 Meanwhile, a place like Iowa or even New Jersey might offer significant deductions for retirement income, exemptions on Social Security, or lower overall living costs that more than make up the difference.

Speaker 1 The irony here is that the very people most obsessed with optimizing their retirement are often the ones who make the least optimized moves because they're optimizing for slogans, not substance.

Speaker 1 No income tax sounds great on a bumper sticker, but it's a poor substitute for an actual retirement plan.

Speaker 1 Personally, I almost moved to New Hampshire over Vermont because there's no income tax until, luckily, I was told by my amazing CPA that there was, in fact, a hefty business profits tax that wiped out any potential savings.

Speaker 1 And then, you know, I'd have to live in a state that allowed billboards on the interstate. No, thank you.
Now, if it sounds like I'm picking on Florida or New Hampshire, well, I am, but only a little.

Speaker 1 This isn't about any one state. It's about the psychology of financial decision-making.
We love simple stories. No income tax equals good, high-income tax equals bad.

Speaker 1 But, as with most simple stories, the truth lives in the footnotes.

Speaker 1 This is why where you live becomes one of the most underappreciated levers in retirement planning that can save you way more than whether you get seven or eight percent return on your portfolio this year.

Speaker 1 Choosing where to retire is not just about weather or golf courses, it's about how all of your projected income interacts with the tax system of the state you live in and how that impacts your long-term financial autonomy.

Speaker 1 Because at the end of the day, as we've explored in the short form content many times, retirement isn't about escaping something.

Speaker 1 It's about designing the version of life that costs you the the least in worry and provides the most in meaning.

Speaker 1 So before you pack up the moving truck, pause and ask yourself, am I moving to a better life or just a better slogan?

Speaker 1 Let's talk about this myth, this great tax mirage in all of its appropriate nuance. No state income tax does not mean best place to retire.

Speaker 1 Not even in financial terms. Here are the nine states that currently have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Speaker 1 And how many of you have sat there over coffee with that exact list in your 40s or 50s and dreamed about which one would work best for you? They all sound great, right?

Speaker 1 You picture yourself drinking the same coffee on a screened-in porch in Naples, muttering no state income tax, baby, like it's a magic spell against the IRS.

Speaker 1 Except, here's where it gets really interesting for most of us. There are four other states, namely Iowa, Illinois, Mississippi, and Pennsylvania, that don't tax IRA withdrawals at all.

Speaker 1 Zero, which means for many retirees, especially those who have saved for decades in a pre-tax account, those four states can actually beat the so-called no-tax states once you factor in how your withdrawals interact with federal taxes, deductions, and the way your income phases out of certain benefits.

Speaker 1 This is where people's eyes usually glaze over, so let's keep it as simple as possible. Even if your state doesn't have an income tax, the federal government still certainly does.

Speaker 1 You can't hide from Uncle Sam by moving to the beach, and he's not impressed by the palm trees. And those no-tax states, as my brother so wisely noted, they'll make it up somewhere.

Speaker 1 Let's take, I don't know, Florida. If you move there, you'll face some of the highest insurance premiums in the country.
Homeowners, flood, hurricane, you name it.

Speaker 1 If you want to move to Texas, have fun with those property taxes. Want to retire to Washington?

Speaker 1 Well, get ready for their business and occupation tax, which effectively acts like an income tax for self-employed people.

Speaker 1 You know, the people who actually would want to move to a state with no income tax. It's just better PR.
That's what I was staring in the face by potentially moving to New Hampshire.

Speaker 1 Think of it like a buffet. The sign might say free, but someone's still charging you at the end an arm and a leg for the drinks.

Speaker 1 And in retirement, you know you need as many functioning limbs as possible for as long as possible. Let's look at some more data.

Speaker 1 According to the Tax Foundation, the average combined state and local tax burden in Florida-that's income, property, sales, and all the little extras-is about 8.6% of income.

Speaker 1 In Illinois, supposedly one of the worst tax states, is 12.9%.

Speaker 1 Sounds bad. Until you realize that Illinois doesn't tax retirement income from IRAs, 401ks, or pensions.

Speaker 1 So if you're living mostly off those accounts, your actual effective rate could be lower than in Florida, especially if your property and insurance costs are high there.

Speaker 1 Or let's take Pennsylvania. The state income tax is a flat 3.07%,

Speaker 1 but it doesn't touch Social Security or retirement plan withdrawals. Meanwhile, Tennessee, a no-income tax state, has one of the highest average combined sales tax rates in the country at 9.55%.

Speaker 1 That's like buying your groceries at a store where the cashier adds a polite mugging fee at checkout. When you step back, the real question is not, does my state tax me?

Speaker 1 It's how much of my total projected retirement income do I actually keep after everything?

Speaker 1 Income tax, property tax, sales tax, insurance, cost of living, or HOA fees. And good luck finding a place in Florida that doesn't have HOA fees.
That's the only number that matters.

Speaker 1 And no, it won't fit on a state bumper sticker.

Speaker 1 And when you start looking at that number, remember, we're looking at the effective tax rate, the whole map of good good and bad states to retire to, or for tax purposes, kind of starts to flip upside down.

Speaker 1 States we love to hate suddenly look sensible. States we worship start to look a little more expensive.

Speaker 1 You start to realize that Florida might not be heaven, and Jersey might not be, well, you know where I'm going with that. They're just different layers of purgatory depending on your accountant.

Speaker 1 In fact, when WalletHub ran a full comparison of taxes for retirees, not just just income tax, but total tax burden, Florida ranked ninth. Not bad, but certainly not first.

Speaker 1 Delaware, of all places, ranked number one.

Speaker 1 Delaware, a state so small it's basically a rounding error on most maps. No offense to people who live in Delaware.
I was just brought up in Waynesworld era where that's what I know about Delaware.

Speaker 1 But it offers low property taxes, no sales tax, and generous retirement income exclusions.

Speaker 1 It's like the quiet kid from high school who ends up owning a yacht and none of us saw it coming because we never thought to take the time to ask.

Speaker 1 The point is, the great tax mirage is powerful because it plays to our emotional brain. We like simple villains and heroes.
No tax good, tax bad.

Speaker 1 But real wealth, real financial security comes from understanding the nuances beyond the slogans. And if you take nothing else from this segment, just remember this.

Speaker 1 Most expensive decisions in life are usually the ones that sound free.

Speaker 1 And we'll jump right back into it after a quick thanks to those helping me keep this show free for everyone and helping me keep my thermostat above 58 degrees in Vermont winters.

Speaker 1 We're about to see the largest wealth transfer in history. roughly $120 trillion moving from boomers to Gen X and millennials.
But here's what nobody's talking about.

Speaker 1 Nearly 80% of those inheritors are planning to fire their parents' financial advisors. Now, it's not about rebellion.
That was the piercings and bad tattoos. The real reason?

Speaker 1 The old model is broken, as I've noted in countless episodes thus far. First, most traditional advisors don't speak your language.

Speaker 1 They're still talking about retirement readiness and diversifying 60% stocks and 40% bonds like it's 1987 while you're trying to figure out equity comp, student loans, and how to actually enjoy your money.

Speaker 1 Second, the scope is too narrow. Traditional advisors often stop at investments, ignoring taxes, estate planning, debt, and real financial life.

Speaker 1 And finally, and come on, you all knew I was going here, the traditional fee structure is outdated.

Speaker 1 When an advisor charges a percentage of your assets, their pay goes up just because the market did, not because they did more for you. And don't even get me started on commissions.

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Speaker 1 Facet is an RIA with the SEC. This is not advice.
All opinions are my own and not a guarantee of a similar outcome. I'm not a member of FACET.

Speaker 1 I have an incentive to endorse FACET as I have an ongoing fee-based contract for cash compensation, as well as a percentage of equity in facet based on this endorsement. And now, back to the show.

Speaker 1 Now, let's get to the fun part.

Speaker 1 And some of these may be surprises to you, because this is where everything you thought you knew about taxes goes flying straight out the window, waving its little 1040 form as it goes.

Speaker 1 Let's start with some of the winners, the unexpected financial overachievers that no one's putting on a glossy retirement brochure anytime soon. First up, as already mentioned, Iowa.

Speaker 1 Yep, Iowa, the land of cornfields, college wrestling, and people who still wave when you drive by. As of this year, Iowa exempts all retirement income for anyone 55 or older or those who are disabled.

Speaker 1 That means no state income tax on pensions, pre-tax IRAs, or pre-tax 401ks, which, on a practical level, can leave retirees there with lower effective tax bills than folks sunning themselves in Florida or Texas.

Speaker 1 It's one of those strange but delightful truths. Sometimes the state known for tractors and tornado sirens quietly beats the one known for beaches and brunch.

Speaker 1 Then there's Pennsylvania, another shocker. The Keystone state completely exempts most forms of retirement income, including Social Security, pensions, and withdrawals from qualified retirement plans.

Speaker 1 Combine that with property taxes that are roughly middle of the pack, and in some rural counties downright gentle, and you suddenly get a picture that's far less rocky balboa running up the steps and way more rocky, financially stable, sipping coffee with 5.5% effective tax rate.

Speaker 1 In fact, according to Smart Asset's most recent data, a couple living off $100,000 in retirement income in Pennsylvania pay less overall tax than the same couple would in eight of the nine so-called no-tax states.

Speaker 1 And then

Speaker 1 there's Jersey, the punchline of half the internet's jokes, the place most people think of when they think about high taxes. But in retirement, New Jersey turns out to be something of a secret weapon.

Speaker 1 For one thing, it doesn't tax Social Security.

Speaker 1 It also lets many retirees exclude up to $100,000 of pension, IRA, and other retirement income, provided their total income stays below a certain threshold.

Speaker 1 And I believe last time I checked, that was about $150,000.

Speaker 1 Add in some surprisingly generous property tax rebates and credits for seniors, and the total math becomes a lot friendlier than you'd ever guess from the state's tax reputation.

Speaker 1 Sure, the property taxes are high. No one's pretending otherwise.
But when you factor in the offsets, the result can at least be shockingly competitive.

Speaker 1 So yeah, the same jersey you've spent 40 years trying to escape might just turn out to be your most loyal financial ally in retirement. Life's funny like that.

Speaker 1 One day you're complaining about the turnpike, the next day it's quietly saving you five grand a year. Now, let's talk about the other side of the ledger.

Speaker 1 Those that also, surprisingly, came up slightly short, because some of these states you'd assume are tax havens turn out to be anything but.

Speaker 1 Let's take Oregon, for instance. It's stunningly beautiful, full of good coffee, pine trees, voodoo donuts, and people who own at least two rain jackets.

Speaker 1 But it's also one of the most expensive states in the country for retirees when it comes to taxes. Its top marginal rate is 9.9%.

Speaker 1 And while that may not sound terrible in isolation, once you layer in property and local taxes, the effective combined rate can climb to around 13%

Speaker 1 for retirees pulling from tax-deferred accounts. That's not a drizzle.
That's a financial downpour. And no matter how good your Gore-Tex is, you're going to get drenched.

Speaker 1 Or take Hawaii, another postcard perfect favorite, also ranks surprisingly high on the pain scale. While it offers some exemptions for pensions, it taxes most other forms of retirement income.

Speaker 1 And when combined with the astronomical cost of living, retirees can find themselves paying far more than they bargain for. Washington, D.C.

Speaker 1 and Minnesota join the ouch list too, each with high income tax rates, relatively limited retirement exemptions, and property taxes that can chew up the savings you thought you were protecting.

Speaker 1 And even some Sunbelt states and others that are stereotypically ranked high on the move here to retire and F the IRS scale might surprise you.

Speaker 1 New Mexico, for instance, has an income tax that can hit retirees hard, especially those drawing from large IRAs.

Speaker 1 Combine that with steep gross receipts taxes, a kind of hybrid made-up term for sales tax, and the net effect is that affordable desert living might not be quite as affordable as the brochures suggest.

Speaker 1 At day's end, it's all a bit like a magician's trick.

Speaker 1 You're watching one hand, the one waving the no income tax sign, while the other hand quietly lifts your wallet through higher sales taxes, insurance costs, or property assessments.

Speaker 1 It's not that these states are lying. It's just that no income tax sounds a lot better on a postcard than our property taxes will make you weep softly into your pina colada.

Speaker 1 So, what's the takeaway here? The tax code and the way it interacts with your retirement income is full of optical illusions.

Speaker 1 The bright lights of no tax can distract you from what's really happening behind the curtain. And in reality, as hopefully we all know, context matters.

Speaker 1 Your mix of income, your home value, and your spending habits. All of it can completely flip the story.
As always and forever, personal finance is personal.

Speaker 1 And just because Doug moved to Florida and is bragging about how little he pays in income tax, your specific scenario might completely offset any income tax exemption that Florida offers depending on how you want to spend your money and your time.

Speaker 1 In other words, there's no universal best or worst state for retirees.

Speaker 1 There's only your best state, the one that makes the most sense once you add up all the numbers, not just the ones on the welcome sign.

Speaker 1 What matters is your effective tax rate, what you actually pay after exemptions, deductions, and all the little quirks that the tax code hides in plain sight.

Speaker 1 And for retirees, those quirks can become enormous. It's the difference between paying tax on your social security or not.

Speaker 1 Between having your IRA withdrawals treated as fully taxable income or being completely ignored. Between living in one zip code where your effective rate is 6% and moving 5 miles away and paying 12%,

Speaker 1 all without ever leaving your time zone or changing your coffee order. It's the kind of subtle math that can quietly add or subtract tens of thousands of dollars over a decade.

Speaker 1 And then last, but certainly not least, you've got to consider whether you're married or single.

Speaker 1 Yes, that same institution that causes debates over how to load a dishwasher and whether the thermostat should live at 65 or 72 can also save you thousands in taxes.

Speaker 1 In some states, being married can reduce your effective rate by as much as six full percentage points. That's a massive difference.

Speaker 1 It's enough to make you wonder, legally speaking, if it might be easier to just marry your accountant. Don't worry, I checked.
The IRS probably wouldn't approve of that one.

Speaker 1 And next week in part two, we will continue that conversation on marriage or being single and what the best states might be for either.

Speaker 1 And even though I said there's no best or worst states, that's certainly not going to stop me from ranking the states anyway from best to worst.

Speaker 1 I'll show exactly how those six percentage points of marital magic work in real numbers, and I'll talk about some of the other things you need to consider beyond taxes when you're deciding where to spend the golden years of your life.

Speaker 1 And if you're enjoying this little voyage into the murky waters of retirement taxation, again, I'd be thrilled if you left a review on Apple Podcasts or Spotify. It helps more than you know.

Speaker 1 Plus, it's the only way to make sure this kind of dry, slightly irreverent wisdom reaches other retirees before they accidentally buy a winter home and a state that will quietly nibble away at their nest egg far more than if they had just stayed home.

Speaker 1 As always, hope this gives you something to think about throughout the week, and I will look forward to continuing part two and helping you figure out how to retire to the state that works best for you.

Speaker 1 Thanks for tuning in to your money guide on the side. If you enjoyed today's episode, be sure to visit my website at tylergardner.com for even more helpful resources and insights.

Speaker 1 And if you are interested in receiving some quick and actionable guidance each week, don't forget to sign up for my weekly newsletter where each Sunday I share three actionable financial ideas to help you take control of your money and investments.

Speaker 1 You can find the sign-up link on my website, tylergardner.com, or on any of my socials at SocialCapOfficial.

Speaker 1 Until next time, I'm Tyler Gardner, your money guide on the side, and I truly hope this episode got you one step closer to where you need to be.