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

Tyler Gardner (0:00)

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

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. So let's get started and get you one step closer to where you need to be. 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. 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. 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? I know, it sounds like the set up to a bad joke. A retiree walks into a cornfield and comes out with way more money. But this episode, this whole two-parter, is about The Great Tax Mirage, 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. 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. 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, every single state will find its way to get revenue from you, and a tax by any other name is still, well, a tax. So today, we're going to unpack why no-income tax might actually be the most expensive lie in retirement planning, 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. I'm allowed to say that. I have a friend who lives in New Jersey, and he has granted me permission. 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. 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. 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? 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, 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. 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. So today, let's start here. 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 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 330 p.m. or wait to arrive fashionably late at 4 p.m. And you know what? You've earned that. You've done the hard part. 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. 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. Every state takes a bite out of your retirement differently. Some just use different utensils. Now, as I will always give credit where credit is due, none of the following is my original work or research. Except for the ill time, 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. They modelled 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. At the very least, they certainly were not what I would expect. 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. Imagine you and your spouse retire to Oregon. You'd pay an effective tax rate close to 13%.