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Retirement strategy for working and retiring in states with different tax bracke

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  • Retirement strategy for working and retiring in states with different tax bracke

    I grew up in California and would hope to move back eventually, probably retiring here. My two most promising job opportunities coming up are in Washington State and Alaska both of which have no state income tax. I always knew that taxes in California were high, but it's crazy to think that I would have about the same effective marginal tax rate earning 400k a year in Washington as 75k in California.

    With this plan in place would it make sense to maximize a Roth401k rather than a traditional, and then to save the remainder in a taxable account? Any other plans to consider for the likelihood that even with decreased retirement income and spending I will likely be at a higher tax bracket?

  • #2

    I take it you're single, then? You're looking so far ahead and have provided so little information that's it's difficult to give solid advice. What are your goals? When do you plan to retire? What are your projected living expenses? Will you remain in a no-tax state for your whole career? Will you marry? How much debt do you have? Etc. etc. Taxes are important, but they're not the whole enchilada (maybe just the cheese or taco sauce).

    You should seriously consider working on a financial plan with a fee-only planner who can monitor and adjust as you go along. You can do the investing on your own, but a planner will coordinate all of the financial pockets in your life into a cohesive plan to help you maximize your possibilities and give you financial clarity.

    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      You are a resident.  You are coming up with your retirement state idea.  There are some other steps in between.  

      Living in a state with no income tax is awesome. But remember that tax laws change.  Building everything around a future move to California in 20-30 years is more than a bit absurd.



      • #4
        Currently single, likely to be married in a few years. Planning to be in a no tax state for 3-5 years before moving back to California and will likely be making the decision and setting up retirement accounts within the next 12 months- so hopefully not thinking too far ahead. This could be a good chance to put 53k a year into a Roth 401k for 5 years instead or other similar strategies. Likely not going to be as much of a factor in terms of financial security compared to savings rate etc but investing 53k per or substantially more does seem like a big deal and I'm hoping to do it in an educated and thoughtful manner.

        Sure, it's possible I'd stay in Washington etc for a 30 year career and beyond but I'm pretty set on at least the next 5 year plan.

        Family income with both of us in medical field would likely be around 500-600k a year outside of California and 400k in California due to lower salaries plus wanting to cut back a little bit with kids around.

        Financial planner for tax and retirement accounts (should I set up defined contribution plan, 401k, HSA etc) will likely need to happen as I finish up residency as there are a lot of variables and I'm not yet sure if I'll be on 1099, W2 etc depending on job offers. Some basic considerations and things to start thinking about would be much appreciated. I hear about people retiring in Florida all the time due to lower taxes plus weather, but fewer who go the reverse and increase the taxes by coming to CA, just figured it might throw off the tax rate arbitrage benefit of the retirement accounts substantially.


        • #5
          That helps! First of all, I have a small piece of bad news: employer matches go into regular 401k accounts, not your Roth 401k. The maximum "designated Roth contributions" that you can have in any one year is equal to your salary deferral amount (in 2016, $18k + an additional $6k for those age 50+). Since you do may not work in AK or WA for your full career, however, you can roll out and convert your pre-tax 401k to a Roth IRA when you leave. I'd recommend doing so while you're still there (before moving back to CA).

          In the meantime, I am a big fan of taxable accounts for their flexibility and lower rates on LTCG and dividends. Behavior and proper diversification/account management will have a far greater impact on your long-term wealth building than will investment choice. Beyond that, follow WCI's number one rule to live like a resident for a few years out of graduation and you'll be well on the path to financial independence even if you do move back to CA in only 5 years.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


          • #6
            Thanks for the advice. That rollover is a good idea to keep in mind.


            • #7
              I'm in a similar situation, working in Washington and earning in the high 6 figures as a W2

              Company benefits are rather crummy, no match so we are just putting away the 18K into a Roth 401K and the rest in taxable

              Also hope to be returning to California but just don't know when