Boomers: Avoid These States With The Highest Taxes That Will Drain Your Nest Egg

The retirement checklist generally starts with some of the most obvious questions: Do you prefer warm winters or four seasons? How about being near family or trying somewhere new? Would you like beach access or mountain views? All of these lifestyle questions are great for boomers to start asking themselves, but there is another consideration here that no one enjoys talking about, and it centers on how much money you pay in taxes to the state you currently live in and the state you are considering moving to.

For better or worse, tax geography matters a great deal, and for Baby Boomers living on Social Security, pensions, and portfolio withdrawals, it's going to matter a whole lot as soon as you see that first tax bill arrive. Thankfully, data from the US Census Bureau can help boomers decide whether to stay or go by giving them the information they need to understand the implications of a move.

The reality is that there is a gap between the highest-taxing states and the lowest, and it spans around $10,000 annually, which is a number boomers cannot ignore. On average, per-capita state and local tax collections sit at around $7,109 nationally, so over a 25 or 30-year retirement, this difference can compound into a six-figure decision that impacts how much overall purchasing power you have in retirement. For this reason, baby boomers might want to avoid these states.

Even with its beautiful mountain backdrops and scenery, Colorado might not be the retirement destination boomers want it to be. First and foremost, the state has a 4.4% flat income tax rate, which does apply to most retirement income, including 401(k) and IRA distributions. All of this contributes to a $7,263 per-capita tax burden for every boomer resident.

Another state with beautiful scenery in the background and plenty of physical activity to keep you busy, Washington is also home to a $7,431 per capita tax burden. Although it lacks a state income tax, the state has an average sales tax of 9.38% and a 9.9% tax on capital gains income over $270,000. The numbers get worse when you consider that its estate tax has been raised to 35%, the highest in the nation.

While Delaware often shows up as being one of the most tax-friendly states for businesses, boomers might not agree when they learn it has a $7,693 per capita tax burden for residents. Not having a sales tax is a nice perk, and the same goes for property taxes that are also lower than boomers would find elsewhere. However, things get murky when boomers discover Delaware has an income tax that can reach 6.6% on any income over $60,000.

Although it exempts Social Security for most retirees and boomers over 65 can exclude up to $8,000 in income, New Mexico still has a $7,752 per capita tax burden to contend with. Of course, the $8,000 exemption sounds good until you learn that anything above $8,000 is taxed at a rate that can reach as high as 5.9%.

Maryland's $8,048 per capita tax burden shouldn't come as much of a surprise, as the state isn't often labeled a retirement destination. This gets even more true when you factor in state income taxes up to 5.75% and county taxes, adding another 3.2% on top of the state number. The lone bit of good news might be that Social Security income is exempt, but 401(k) and IRA distributions can face a combined rate of 8% in some counties.

Minnesota is well-known for its healthcare, which arguably makes it a popular retirement destination, but it's also an expensive one as well. The state's per capita tax burden is around $8,050 for every boomer resident, and it taxes Social Security benefits for high earners, so this is very much something to consider for anyone looking to move to the land of 10,000 lakes.

If property taxes are a major concern, boomers will want to stay as far away from Illinois as possible, as it ranks second-highest in the country for property taxes. This reality helps explain its $8,148 per resident tax burden, and even though all retirement income is exempt, the property tax burden cannot be ignored. Homes are often taxed around 2% of home value, meaning that a $400,000 home has homeowners paying $8,000 every year just in property taxes.

Vermont is a beautiful and quiet retirement destination for those who want to escape big city noise, but this peace comes with a price. Vermont is also home to the highest property taxes in the nation, which explains its $8,158 per capita tax burden on residents. In some areas of the state, income tax can reach as high as 8.75%, which is hard to swallow no matter your income level.

North Dakota is in a unique position as far as being considered a retirement destination, as it offers a generally low cost of living as well as safe and quiet communities. However, it has an $8,961 per capita tax burden, but this number is definitely misleading. The reason North Dakota has such high taxes is because of its severance taxes on oil and gas extraction, but this number is frequently paid by out-of-state energy consumers, leaving North Dakota and its lack of an income tax as a sound retirement destination in almost every other way.

With access to world-class healthcare, no taxes on Social Security income, and active senior living lifestyles, you might think Massachusetts doesn't belong on this list. Unfortunately, the state also has a top rate on state income tax of around 9%, and it still taxes 401(k) and IRA distributions at 5% and 9%, respectively, on any dollar over $1 million. This helps explain its $9,341 per capita tax burden.

It's safe to say that New Jersey might not top the list of retirement destinations, but for those who live and grew up here, it's home. The area's access to high-quality healthcare can't be ignored, and neither can a state exemption on Social Security benefits. The hard reality is that the state's $9,500 per capita tax burden is no doubt a response to its income tax reaching as high as 10.75%.

Hawaii is something of a conundrum for boomers to retire, as it offers some of the best weather and outdoor activities anywhere in the United States. This kind of lifestyle does come with a hefty price tag to the tune of a per capita tax burden of $9,503 for every resident, even with Social Security being exempt. The challenge for boomers is that both 401(k) and IRA distributions can be taxed as high as 11%.

Exempting anyone with income below $75,000 individually or $100,000 when married, Connecticut can be a great place to live and enjoy retirement. The challenge is that it's also one of the highest property tax states in the country, and this is before you consider that it has a state income tax that can go as high as 6.99%. This culminates in a $9,178 per capita tax burden for residents, the third highest in the country.

Often considered the most expensive state to live in for boomers, California is actually a surprising number two, according to the US Census Bureau data. Income tax can reach as high as 13.3%, the nation's highest, but this negative comes with a positive, as Social Security income is tax-exempt. All other retirement income is taxed normally, contributing to its $10,319 per capita tax burden.

At the very top of states, boomers should avoid a strict tax position, it's New York. There is no question that it's a popular retirement destination for those who enjoy all four seasons and access to some of the world's richest culture and activities. Still, you can't ignore its $12,685 per capita tax burden and income tax thresholders that can reach 10.9%. Add in some of the nation's highest property taxes, and New York is a state to avoid.