Geographic Arbitrage of State Taxation in Retirement

We’ve come into a very interesting situation since moving states: Pennsylvania taxes all contributions to a “tax-deferred” account (like a 401(k)/403(b) or Traditional IRA).  BUT, it does not tax withdrawals on those accounts.  We have about 400k that we won’t have state taxation on if we stay in the Commonwealth of Pennsylvania – AND we didn’t pay state tax in VA on that amount either.  However, over the next ten years, we’ll be paying PA state tax on about 750k of contributions to our retirement accounts.  If we then move to a state that taxes retirement withdrawals (like Virginia, Colorado, etc), we’ll end up being “double taxed” on that 750k.  If we don’t want to double pay state taxes, we’re stuck with retiring in states that don’t have an income tax or don’t tax retirement withdrawals.

However, it does present a potential for geographic arbitrage if you are so inclined – you may never have to pay state taxes on your retirement money.  Earn it in a state where you can deduct it (following federal rules), and then withdraw it in a state that doesn’t tax it.  Note, I didn’t say *spend* it in that state necessarily….  I have some ideas percolating on how to withdraw all of it prior to leaving the state of PA.  It also bolsters my argument for moving to a state like Wyoming to retire – sorry, most of the other non-tax states are too far south for my tastes!

Disclaimer: I am not a CPA, and this is just my interpretation of PA’s taxation rules.

Have you considered what moving in retirement may do to the taxation of your “tax-advantaged” money?

3 thoughts on “Geographic Arbitrage of State Taxation in Retirement

    1. Mom Post author

      I’m jealous about no state income tax. I thought I’d like income taxes better than high sales tax, but I can control sales tax to a certian extent.

      1. Mrs PoP

        Not to mention our sales tax is really reasonable. In our county it’s just 6%. And we pay ~1% of assessed value in property tax, also totally reasonable. =)


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