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|
|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)|
|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.)|
|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|
|2.||District of Columbia||49.||Arkansas|
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.|
Is Your HSA a Retirement Tool?
|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.
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.
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 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.|
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