When you retire, you might need to draw down your IRA. In that case, moving from a high-tax state to a state with little or no income tax can pay off. Under a federal law, states can’t tax IRA distributions paid to a former resident who is now living in another state.
Suppose you spent your entire career living and working in a high-tax area. You were able to build up a significant amount of pre-tax dollars in your IRA. Now you’ve retired and moved to a low-tax state. Under the law, your old high-tax state won’t be able to collect tax on those IRA distributions, even if you avoided state income tax by making retirement plan contributions.
Similarly, it might pay to move to a low-tax state before converting a traditional IRA to a Roth IRA. Such a conversion will generate tax on the investment income you deferred, but you can minimize or avoid state income tax by moving before the year of the conversion.
You probably won’t want to move just to save a few thousand dollars in income taxes on IRA distributions. However, if you are thinking of making a move, it might pay to defer IRA distributions or Roth IRA conversions until you’ve relocated to a low-tax state.
