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Road to retirement


Whether you're on the entry ramp or the leisure exit, these tips can ease your retirement journey.

Finding the perfect U.S. retirement tax haven

It seems like it would be easy to find a tax-friendly place to while away your golden years. Nine states don't have an income tax. Five don't levy any sales tax. By this measure, a perfect state to retire to is Alaska, since it falls into both groups. There's just that minor issue of the weather.

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Think a little snow -- OK, maybe a lot -- is a fair trade to avoid state taxation? Don't pack your parka just yet. Alaska isn't totally tax-free.

Some Alaskan municipalities do charge local sales taxes. Some cities and boroughs (roughly equivalent to counties) also collect property taxes, although the first $150,000 of assessed value is exempt if it's owned by residents 65 or older. And for the time being, the state still has an estate tax, something to think about if you're worried about what you'll leave the grandkids.

The Land of the Midnight Sun is a prime example of the complexities you could face when looking for a domestic retirement spot on the basis of tax considerations. You've got to sort through 50 states and the District of Columbia, each with its own set of tax rules, not to mention the assortment of local taxing jurisdictions they contain.

Even then, if you simply use tax rates as the overriding factor in deciding where in the United States to retire, you could make a big mistake.

Taking taxes personally
The two big taxes that everyone worries about are income and real estate taxes. These could be of special importance for retirees, since they could have an inverse relationship, says Bob D. Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals.

"Look at your particular situation," says Scharin. "Perhaps you have a moderate income, but want to buy as big a house as possible since you'll have family, grandkids, visiting a lot. In this case, you'll be more sensitive to the real estate tax than the state's tax on your moderate income.

"When you buy a house, you always ask: How much is the real estate tax on the property," says Scharin. "But also try to find out if you make renovations, would that be re-evaluated and taxes go up?"

The answers could be critically important to a fixed-income retiree facing increasing property taxes.

"The flip side is the retiree with a higher income who says, 'I've had enough of cooking and cleaning and am happy to be in small apartment, eating out in restaurants,'" says Scharin. That well-off retiree won't have the property taxes to worry about, but because of his resources, he could be hit harder by a state's income-tax rates.

Where the money comes from
Just how hard the income tax hit will be depends not only on where you decide to retire, but also the source of your retirement money.

-- Posted: Nov. 7, 2005
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