Is Your State FIRE Friendly?

FIRE Friendly State Logo

Congratulations! You busted your hump for years. You maxed out your income at your main job and picked up a few side hustles along the way. You always took advantage of all the ways Uncle Sam loves side hustlers. You stashed your cash in a solo 401(k), supercharged your savings with a cash balance plan and when that wasn’t enough you opened a taxable account and started stockpiling money there as well.

Now you’re in your early 50s and you’ve achieved your morbidly obese FIRE. Your taxable account is so big you won’t even need to think about touching your tax advantaged accounts for another decade or two. There’s just one question – where should you live?

Your Mission

Figure out the most a married couple could withdraw from a taxable account without owing federal taxes. Then figure out what state gives you the most bang for your buck.

For the purpose of this experiment we will make the following assumptions:

  • The couple is 100% retired and their only source of income is dividends and capital gains from their taxable account.
  • The couple is taking the standard deduction. I know you may be planning on cashing in years of tax loss harvesting, making gigantic charitable donations or deducting the interest from your big dumb house. We’re going to keep this as universally applicable as possible.
  • All states treat long term capital gains and qualified dividends the same. *This one is only 94% true. 47 states tax LTCG and qualified dividends the same. 3 states tax dividends higher than LTCG:  Hawaii (11% vs 7.3%), Tennessee (6% vs 0%) and New Hampshire (5% vs 0%). We will give the residents the benefit of the doubt that they planned accordingly to take advantage of the lower rates.

Take it to the Max

For a married couple filing jointly, LTCG and qualified dividends are tax free if their adjusted income is less than $77,200. Since the standard deduction for a married couple is now $24,000, they could receive $101,200 in LTCG/dividends without owing any federal taxes.

federal tax free LTCG and dividends
$101,200 tax-free capital gains and dividends from sea to shining sea.

Enter the Taxman

Using this calculator, I crunched the numbers to see how much of that $101,200 is left after paying state taxes.

after state taxes

Top 3 (7):  There are 7 states that do not tax long term capital gains or qualified dividends:  Alaska, Washington, Texas, Nevada, Florida, Wyoming and South Dakota. $101,200.

Bottom 3:

48.  Hawaii:  $94,901

49.  Iowa:  $94,486

50.  Oregon:  $93,009

Cost of Living

State taxes aren’t the only thing that eat away at your FIRE funds. There’s those pesky costs of living to worry about too.

Three of the biggest costs of living are food, housing and transportation. If you haven’t already read Accidental FIRE‘s excellent post on The Cost of the Big Three Expenses by State, now would be the perfect time.  I once again summoned all my mighty math powers and multiplied his monthly state costs by 12 to come up with an annual figure.

After subtracting the cost of the big 3 from the post tax FIRE funds you can quickly see that some states are more FIRE friendly than others.

after state taxes and cost of living

Top 3:

1.  South Dakota  $75,868

2.  New Mexico  $75,410

3.  Arkansas $75,317

Bottom 3:

48.  Massachusetts:  $59,398

49.  New Jersey:  $57,764

50.  Hawaii:  $55,865

Lessons Learned

Taxable accounts aren’t that bad – a couple can legally and easily collect $101,200 in capital gains and dividends without paying a cent in federal taxes. No smoke and mirrors. No complicated 13 step processes. No caveats that involve obscure tax deductions. Just following the law.

Just because a state is a great state to build wealth doesn’t mean it’s a great state to enjoy your wealth.  2 of the top 3 states for FIRE (New Mexico and Arkansas) didn’t even crack the top 10 in Location, location, location.  Likewise, none of the top 3 states from that post (Texas, North Dakota, Mississippi) made it to the top 3 on this list.

There is a $20,000 difference between the most and least FIRE friendly state.

After factoring in state taxes and cost of living, there is minimal difference between FIRE-ing in Trenton, NJ and Maui, HI. What are you waiting for, Bruce Springsteen?!?

There is never a phase of your career or retirement where a financial argument can be made for living in California or Hawaii. You can however make a valid argument that it has some of the most stunning natural beauty, some of the most delicious food and funnest places to visit.

Limitations

I realize that there are limitations to this study. Not everyone who FIREs has $0 in earned income. Not all dividends are qualified.

There’s a big difference between $101,200 in capital gains and $101,200 in total income – you could sell stocks or funds you paid $100 or $100,000 for and end up with the same amount of capital gains based on the sales price.

This also ignores interest from municipal bonds or income from Roth IRAs or HSAs.

All of those are fair critiques. However, those are equally true in all 50 states.

I don’t where I will end up when I retire. I’d prefer somewhere heavy on beaches and light on taxes. Wherever you move for retirement, make sure you factor taxes and cost of living into your decision.

What do you think? Are you considering moving for retirement? Should Bruce Springsteen be singing about Honolulu instead of the Jersey shore? Share your thoughts and comments below.

 

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11 thoughts on “Is Your State FIRE Friendly?

  1. I do know that the taxes on investment gains in TN is set to phase out (it is called the Hall tax) I believe in a couple of years. That will likely bump that state up some in the rankings (it has no state income tax)

    Liked by 1 person

  2. Good post. I thought that Tennessee tax on investment income was sunsetting. I live about 20 miles from Tennessee so maybe I should move. I think you have to do a deep dive before moving to save on state tax. You also have to factor in property tax and sales tax. Thought provoking.

    Liked by 2 people

    1. There’s definitely a lot of factors to consider. Obviously you have to enjoy the actual location too. When I retire I want to be near the ocean and never see snow again. No amount of tax breaks will send me to North Dakota (apologies to any ND readers)

      Like

  3. Thank you, these are the kinds of state comparisons I’m really interested as I contemplate where I might retire. There is so much to consider. I like WA because there is no state income tax, and if close enough to shop in OR, I’d pay no sales tax! South Dakota is also a pretty state – I hadn’t considered that one, but maybe I’ll do some more digging into what it offers.

    Like

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