What States Do Not Tax TSP Withdrawals?

Understanding how taxes affect Thrift Savings Plan (TSP) withdrawals is crucial for federal employees and retirees aiming to maximize their retirement income. The taxation of TSP withdrawals varies across the United States, influencing financial planning strategies. Identifying states that offer tax advantages on TSP withdrawals can provide retirees with significant financial benefits.

States with No Personal Income Tax

Relocating to a state without personal income tax can help retirees stretch their savings, as these states do not tax income at the state level, including TSP withdrawals.

Alaska

Alaska’s reliance on oil revenues allows it to avoid imposing a personal income tax, making it an appealing choice for retirees seeking tax-free TSP withdrawals. However, the state’s remote location often results in higher costs for goods and services, such as groceries and utilities, which can offset the tax savings.

Florida

Florida’s absence of a state income tax and its reputation as a retirement haven make it a popular choice for retirees. Tourism revenue supports the state’s tax policies, allowing TSP withdrawals to remain untaxed. While the cost of living is relatively low, factors like property taxes, insurance costs, and hurricane risks should be considered when planning a move.

Nevada

Nevada benefits from its gaming and tourism industries, enabling it to maintain a no personal income tax policy. Retirees enjoy tax-free TSP withdrawals, but higher sales and property taxes might reduce overall savings. A thorough financial evaluation is recommended to account for these additional costs.

South Dakota

South Dakota’s agricultural and tourism revenues sustain its tax-free status, including for TSP withdrawals. The state also boasts low property taxes and no inheritance tax. However, retirees should weigh the challenges of harsh winters and limited amenities before relocating.

Texas

Texas leverages its diverse economic base—spanning energy, technology, and agriculture—to operate without a state income tax, benefiting retirees with tax-free TSP withdrawals. While the state offers a relatively low cost of living, high property taxes should be factored into retirement planning.

Washington

Washington’s thriving technology, aerospace, and agricultural sectors support its no personal income tax policy, which includes TSP withdrawals. However, higher sales and excise taxes, along with regional variations in the cost of living, particularly in urban areas like Seattle, require careful consideration.

Wyoming

Wyoming’s reliance on natural resources, such as coal and minerals, allows it to maintain a no personal income tax environment, exempting TSP withdrawals. The state also has one of the lowest property tax rates in the nation. However, limited access to healthcare and amenities should be evaluated when considering Wyoming as a retirement destination.

Partial Exemptions for Federal Retirement Income

Several states provide partial exemptions for federal retirement income, which can benefit retirees. Illinois, Pennsylvania, and Mississippi, for example, do not tax distributions from qualified retirement plans like TSP. Illinois exempts federally taxed retirement income from state income tax, while Pennsylvania excludes retirement income entirely. Mississippi offers an exemption on retirement income for individuals over 59½, aligning with IRS rules for penalty-free withdrawals.

Despite these advantages, retirees should also consider other state taxes, such as sales and property taxes, which may offset the benefits of income tax exemptions. The presence of estate or inheritance taxes in some states can further complicate financial planning. Consulting with a tax advisor familiar with state-specific regulations is essential for optimizing retirement income and minimizing tax burdens.

Residency Requirements for TSP Taxation

Understanding residency requirements is key to navigating state-specific tax rules for TSP withdrawals. Residency status determines how states tax retirement income and is often based on criteria such as physical presence, domicile, and intent to reside.

Physical presence tests typically require individuals to spend a certain number of days in a state to establish residency. Domicile, a legal term for a person’s permanent home, may require proof through voter registration, vehicle registration, or state-issued identification. These factors collectively influence the tax treatment of TSP withdrawals, making it important for retirees to maintain thorough documentation.

Intent to reside is another critical factor, assessed through personal actions and declarations. Changing domicile involves severing ties with a previous state and establishing a new permanent residence. States like New York and California conduct stringent residency audits, requiring careful planning and documentation when transitioning residency. Retirees who understand these nuances can better position themselves to optimize their tax strategies.