Why Retirement Savings Varies From State to State
The U.S has several tax systems: Capital gains, state income, federal income, and sale and property, amongst others. It’s important to keep taxes in mind when planning for retirement, so today we will be addressing state tax planning.
In issues relating to taxation, CPA Bob Leins of Turner, Leins, and Gold provides some advice. He says that you will first have to find out if you are required to pay state income taxes on your Federal Employees Retirement System or Civil Service Retirement System, Thrift savings Plan distributions, and Social Security income. Florida, Texas, New Hampshire, Nevada, Washington, South Dakota, Alaska, Tennessee, and Wyoming are states without state income tax. However, Tennessee and Hampshire tax income and dividends from investments, while some states disallow taxation on retirement income.
The Social Security Administration and TSP do not withhold income tax of any state. State income tax withholding is typically generated by the Office of Personnel Management. However, this is usually done after your retirement claim has been finalized by OPM. Based on your personal decision, you may want to withhold more state income tax from your FERS or CSRS benefits if you wish to make up for withheld state tax from Social Security or TSP distributions (if you are required to pay state tax on the benefits).
In the event you decide not to withhold state tax from your benefits, you can pay the estimated amount directly to your state’s tax authority.
To obtain reliable and up to date information on state income taxes and retirement, you can check out The National Active and Retired Federal Employee Association’s state tax yearly roundup, featured in NARFE magazine (April’s edition), and the annually updated Kiplinger’s state tax map. Back in 2013, a summary of state taxes on retirement income was published in the Wall Street Journal. So you may want to check for your state’s income rules, just to be sure it hasn’t changed.
North Carolina changed the rules some years back, exempting CSRS pension benefits from state income tax. However, most retirees under the FERS are required to pay tax. This is attributed to the Bailey Decision, a North Carolina Supreme court ruling in 1991. The ruling made only those who have served actively in government for five years before August 12, 1989, eligible for state income tax exempt.
At the verge of retirement, you may be temporarily placed on retired status as your retirement claim gets processed by OPM. The Office Of Personnel Management does not allow state tax withholding, only federal tax withholding. Where claims are processed quickly, you may get one or two temporary payments; but where OPM has excess applications, or if your paperwork has an issue, then you may be receiving more interim payments. You need to decide how you wish to settle your state taxes within this period.
At retirement, you can make use of the OPM Services Online to change how the tax is withheld from your FERS or CSRS retirement benefit. The law requires the OPM to update withheld federal income tax according to the annual formulas established by IRS. You are allowed to your tax withholding rate whenever you wish. It is recommended that you confirm your state and federal withholding amount annually.