August Newsletter | R.D.M. Tax Service

ope you’re having a great summer. This month’s newsletter overviews the different kinds of state and local taxes that may impact your choice of where to live during retirement. It also looks at the pros and cons of using a Health Savings Account as a tax-advantaged savings tool. There are some tips for conducting an insurance self-review, and advice on becoming a smart renter.

As always, feel free to forward this newsletter to anyone who may benefit.

The Most- and Least-Taxed States for Retirement

When it comes to choosing where to live during retirement, weather isn’t the only consideration. State and local tax laws have a big impact on your nest egg.

The charts here show the highest and lowest state tax rates and costs of living, from data provided by nonprofit think tanks the Tax Foundation and the Council for Community and Economic Research.

State Income Tax Rates
Highest		Lowest
1.	California (13.3%)	50.	Alaska (0%)
2.	Oregon (9.9%)	49.	Florida (0%)
3.	Minnesota (9.85%)	48.	Nevada (0%)
4.	Iowa (8.98%)	47.	South Dakota (0%)
5.	New Jersey (8.97%)	46.	Texas (0%)
6.	Vermont (8.95%)	45.	Washington (0%)
7.	Washington DC (8.95%)	44.	Wyoming (0%)

State and Local Sales Taxes (state and average local tax rates combined)
Highest		Lowest
1.	Louisiana (10%)	50.	Delaware (0%)
2.	Tennessee (9.5%)	49.	Montana (0%)
3.	Arkansas (9.3%)	48.	New Hampshire (0%)
4.	Alabama (9%)	47.	Oregon (0%)
5.	Washington (8.9%)	46.	Alaska (1.8%)

Property Taxes (Rankings based on the statewide average of local rates.)
Highest		Lowest
1.	New Jersey	50.	Hawaii
2.	Illinois	49.	Alabama
3.	New Hampshire	48.	Louisiana
4.	Connecticut	47.	Delaware
5.	Wisconsin	46.	Washington DC

If taxes were the only consideration in our retirement destinations, everyone would move to Alaska, which has no state income or sales taxes. However, the “last frontier” state also has one of the highest costs of living in the U.S. Therefore, you may also wish to consider which states have high and low costs of living.

Don’t Forget: Cost of Living
Highest		Lowest
1.	Hawaii	50.	Mississippi
2.	District of Columbia	49.	Arkansas
3.	California	48.	Oklahoma
4.	Alaska	47.	Michigan
5.	New York	46.	Tennessee

Be a Smarter Renter

Renting an apartment or condo, leasing a piece of equipment, renting business property, or leasing a car all involve the common practice of borrowing something that is owned by others. This experience can easily become a nightmare with a bad landlord or if you don’t understand your obligations. Here are some hints to become a smarter renter.

	Read all agreements. Read the lease agreement thoroughly prior to signing. Ask for clarification of anything you do not understand. Look for clauses in the agreement that might suggest this property owner has problems with its current tenants. If it seems unfriendly, don’t sign it.
	Negotiate upfront. Be ready to negotiate your lease terms upfront. If anything is unclear in the lease, have it clarified and put in writing. Do not depend on word of mouth. Be very clear about security deposits, first- and last-month rents, and services included in the lease.

	Follow the terms. Be the tenant that pays a little early, not the one that always pays late. That way if you ever need a little extra time to pay, you have established the necessary trust to do so.
	Proactive disclosure. If you think you will need a temporary exception to part of the lease, try to include it in your upfront negotiations. This could be something like a specific rent schedule or allowances for a pet. If this is not possible, consider proactively disclosing the exception to your property owner. This will help build trust and a reputation as a good tenant.
	Keep the property clean. This is especially important if you have a pet in a rental home. When landlords come into your home, you will build confidence if the place looks like you treat it as if you owned it. The same is true with rented equipment. Always return it cleaner than you received it.
	Know the owner and neighbors. Building a relationship with the property owner and your neighbors helps. If your neighbor has a problem, wouldn’t you rather have them come to you than your landlord? Establishing a good working relationship with a landlord will help you when you need help with a problem in your apartment or with the equipment you rent.
	Leave with a smile. This is especially true for home and vacation rentals. When you leave, have the property cleaned and hassle-free for the landlord. Request a reference from the landlord for future rentals.

Is Your HSA a Retirement Tool?

The Good, the Bad and the Ugly

Health Savings Accounts (HSAs) are a great way to pay for medical expenses, and since unused funds roll over from year to year, the account can also provide a source of retirement savings in addition to other plans like 401(k)s or IRAs.

But be aware HSAs can also come with significant disadvantages and less flexibility when compared with other retirement investment tools.

The Good

HSAs work best when they are used for their designed purpose: to pay for qualified medical expenses. Neither your original contributions to an HSA nor your investment earnings are taxed when used this way.

This makes HSA funds valuable, given that medical costs are one of our largest expenses as we age. The Employee Benefit Research Institute estimates the average 65-year-old couple needs $264,000 to pay for medical care over the course of their retirement. Being able to cover that amount with pre-tax dollars greatly extends the value of retirement savings.

In addition, unlike other retirement plans, there is no required distribution of funds after you reach age 70½.

The Bad

First, you can only contribute to an HSA if you have a high-deductible health insurance plan. That means you will pay more out of pocket each year when you need to use health services, which could make it difficult to build a balance within your HSA.

Second, contributions are limited. Currently, annual contributions to HSAs are limited to $3,400 a year for individuals and $6,750 a year for families. These limits get bumped up by $1,000 for people aged 55 or older. You also may only contribute to an HSA until your retirement age.

Finally, HSAs typically have fewer investment options compared with other investment tools including 401(k)s and IRAs. The accounts often have high management and administrative fees. All this makes building HSA earnings tough to do.

The Ugly

The worst thing about HSAs: before you reach age 65, non-medical withdrawals from HSAs come with a whopping 20 percent penalty. Plus non-medical withdrawls are taxed as income. Even after age 65, both contributions and earnings are taxed when they are withdrawn for non-medical expenses.

In this way, HSAs compare unfavorably with 401(k)s and IRAs, which end their early withdrawal period earlier, at age 59½. They also have lower early withdrawal penalties of just 10 percent.

HSAs are a powerful tool to help manage the ever-rising costs of health care. Knowing the rules and the costs associated with using these funds outside of medical expenses can help you get the most out of an HSA and avoid costly missteps.

Don’t Forget to Review Your Insurance

When was the last time you reviewed your insurance coverage? An annual insurance review makes good financial sense. Here are points to consider as you review your various insurance policies.

	Health care. If you have an individual policy, investigate whether your employer, union or professional association offers a less expensive group policy.
	Long-term care. Long-term care insurance may be advisable if you’re between the ages of 55 and 72 and you don’t have enough assets to fund long-term care.

	Life. The protection you need depends on the number of people who rely on you for support. Whole, variable, and universal life policies combine insurance coverage with an investment future. If you want insurance only, consider term life.
	Disability. Studies show that less than one in six Americans own enough disability insurance to provide a comfortable lifestyle during a two-year disability. Disability coverage is generally limited to 60 percent to 70 percent of salaried income. If you have adequate emergency funds, electing a longer waiting period for coverage to kick in will reduce your premiums.
	Homeowners. With fluctuations in the real estate market, it’s possible that your home is now under- or over-insured. Coverage equal to the current replacement cost (excluding land), not its original cost, is advisable.
	Auto. Liability insurance is a must, but consider dropping collision coverage if you can afford to repair or replace the vehicle on your own. Collision insurance is probably required if your car is financed or leased.
	Umbrella liability. Personal liability coverage is included with most homeowner and auto policies. However, if you own substantial assets, umbrella coverage will provide additional protection at minimal cost.
	Unnecessary insurance. Carefully examine policies with narrowly defined coverage (such as credit, travel, or cancer insurance). They often duplicate other coverage in policies you may already own.

As always, should you have any questions or concerns regarding your situation please feel free to call.

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The Most- and Least-Taxed States for Retirement

Be a Smarter Renter

Is Your HSA a Retirement Tool?

Don’t Forget to Review Your Insurance

Tax Tips and News

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