Can you transfer state retirement to another state? You could change your retirement system when you opt to work for an alternative state government as long as you are willing to pay the associated costs. But you can retire to any state in the union if you are prepared to pay some taxes there.
Taxation After Retirement
According to the Social Security Administration (SSA), a typical older person receives an average of $1,542.22 per month, as of June 2022, for their retirement benefits, excluding other types of retirement investments. However, various states have different taxation laws that will affect the take-home benefit amount.
State Income Tax
All but nine states have various state income tax rates. The AARP lists these as:
- South Dakota
- New Hampshire
Defined-Contribution vs. Defined-Benefit Plans
The IRS defines both defined-contribution and benefit plans. Defined-contribution plans specify what you will contribute to your retirement account and include the 401(k). On the other hand, a defined-pension plan specifies how much you will receive as your monthly pension after retirement; this includes the SERS defined-benefit pension used by the Pennsylvania state government.
Relocating outside your state may affect how much you receive even if the gross benefit is the same throughout. For example, while New Hampshire doesn’t tax regular income, it does tax interest and capital gains.
Plus, the AARP says that some states don't tax pensions (defined benefits) and tax retirement distributions (from defined-contribution plans), while others will exclude one of those but not the other. For example, Hawaii doesn’t tax pensions but taxes defined-contribution plan investments. On the other hand, Mississippi excludes both, as well as IRAs.
Military Retirement Income Taxes
Some states tax military income partially, while others exclude it from state income taxation. For example, in Virginia, Congressional Medal of Honor recipients don’t pay taxes on retirement income, but states like Maine exempt military retirement income regardless of your status.
Social Security Benefits
Some states tax Social Security benefits partially or fully. The AARP lists these states as:
- West Virginia
- New Mexico
- Rhode Island
State Property Taxes
Property taxes vary from one state to another. However, they are more stable and may end up being lower than other kinds of local taxes.
According to the Tax Foundation, the following states have the lowest property tax rates:
- New Mexico
The worst property tax rates are in:
- Washington, D.C.
- New Jersey
- New Hampshire
- New York
State Sales Taxes
- New Hampshire
Changing From One Retirement System to Another
State government pension systems are not always portable. And, if you relocate and transfer your benefits, you could lose some service time.
Effects on Vested Contributions
If you are vested already, you can get all contributions and interest due to you. Plus, you can put your account in deferred status to avoid losing some of your benefits until you are almost ready to retire. There won’t be any more contributions, but you will get all that is due to you.
Effects on Unvested Contributions
If you aren't vested, the University of Texas explains you should try to stay put until you are so that you can defer your account. But you can also request a refund and give up future service rights to that pension plan. If you are close to the vesting deadline, you could also pay into the system and buy service credits to become vested.
Effects on Partially Vested Contributions
If you are partially vested, you may get some of your contributions back while still enjoying some of the pension benefits due to you.
Purchased Service Credits
Research about the destination state’s service credits. Then you can get a refund from your current pension system and use the money to buy into the new plan. However, the process is costly, and you are likely to lose some service time.
Roll Over Your Retirement Funds
You can roll over your contributions into another qualified plan in a new state, such as a 401(k) or an IRA. But first, you'll need professional financial advice to avoid creating a taxable event.
Reciprocity: Tax Agreements Between States
According to the Tax Foundation, some states have reciprocal agreements concerning taxation to help reduce the tax burdens of their common residents and employees. So, see if you can use them to apply for a withholding exemption in your work state and file taxes in your resident state.
State defined-benefit plans are rarely portable, so you should make suitable arrangements. Remember to consider the taxation rules in your destination state to keep most of your benefits.
- Social Security Administration: Monthly Statistical Snapshot, June 2022
- AARP: 9 States That Don't Have an Income Tax
- Internal Revenue Service: Definitions
- AARP: 12 States That Won't Tax Your Retirement Distributions
- AARP: Which States Tax Social Security Benefits?
- Tax Foundation: Ranking Property Taxes on the 2022 State Business Tax Climate Index
- CNBC: Here Are the 5 States That Don’t Have Sales Tax, and What You Need to Know About Each
- UNT.Edu: Transferability of Public Employee Retirement Credits Among Units of Government
- Tax Foundation: Tax Reciprocity Agreement
- TeacherPensions.org: Buyer's Remorse
- Michigan.gov: Leaving State Employment?
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.