Iowa Fiduciary

Will Lower Retirement Taxes Keep You in Iowa?

Many retirees look for warmer climates in their golden years, such as Arizona or Florida. However, with Iowa lawmakers working to eliminate state taxes on retirement income, Iowa really might be the ideal place for you.

Iowans seeking the best place to spend their retirement years needn’t look far. If you desire a low cost of living and economic opportunity all placed in the setting of smaller cities and towns – then yes, Iowa is a great state to live in. In fact, depending on the location within the state, the average cost of living in Iowa is about 10-15% lower than other states in America. Groceries, utilities, and transportation all contribute to the cost savings.

Furthermore, the recent news that Iowa lawmakers are working to eliminate state taxes on retirement income could sway many fleeing residents to stay put throughout their golden years. Will this be enough to keep you in the Hawkeye State through the long, harsh winters?

Benefits of Retiring in Iowa

Iowa has been booming with industry and a new economy over the last several years but the housing prices are still one of the lowest in the nation. Traditionally people think of Iowa as largely agricultural. But Iowa offers so much more to its citizens; with a variety of great towns and cities with an abundance of amenities. 

Today’s seniors are finding those activities, community engagement and great friendly environments to be a welcoming place to wind down after working life comes to a close. As mentioned, an added bonus is that Iowa is affordable – more so than many of the states retirees are coming from. One of the advantages of retiring in Iowa, is that residents over 65 with an income of less than $32,000 are exempt from the state income taxThis exemption only applies to married couples and widow/widowers in Iowa. To get it a couple would have to file a special Iowa state income tax return called an Alternate Tax Calculation. Even if the couple does not get the exemption they could end up paying a lower Iowa tax rate. 

Iowa also allows for you to exclude your retirement income from your state return. 

Taxing Retirement in Iowa

As of March 2021, nine states do not tax any retirement income because they do not have any state income tax for anyone. Three more states do not tax income from either retirement plans or pensions, and two tax income from retirement plans but not pensions. Iowa has a state income tax on most retirement income, with some exclusions.

Recently, Governor Reynolds has proposed eliminating the state tax on retirement income. According to a preliminary analysis by the state budget office, provided by the House Republican staff, the bill would reduce state general fund revenue by $186.6 million in 2023 and gradually increase to a reduction of $396.5 million in 2028.

In addition to making her proposal to eliminate retirement income tax, Reynolds has also pitched a plan for Iowans who do pay state income taxes to within four years pay a flat rate of 4 percent, which used to range from 4.4-6.5%. 

A flat tax rate can be a good thing or a bad thing depending on which end of the financial spectrum you sit on. Some of the state’s highest-paid workers would see a 38.5 percent income tax reduction, while some lower-income workers would get just a 9 percent reduction.

The move came after roughly 12% of IPERS retiree benefits, money that was raised and invested in Iowa, is now going out of state to the retirees around the country and around the world, and there’s speculation this tax code is driving the migration. If passed, Iowans will move to one of eight or nine states that have no income tax at all, or three other states that don’t tax retirement income simply to help maximize their savings as they work off of either fixed income or whatever else they’ve earned through the course of their career. Republican lawmaker Gary Mohr introduced HF 2026 saying his goal is not to stop retirees from spending time in warmer weather but to stop the incentive for Iowans to change their state of residence.

Final Thoughts

Retirees have specific financial concerns, and some states have taxes that are friendlier to those needs.

If you’re looking for peaceful (and state income tax-exempt) living in your golden years, check out Iowa; the Hawkeye State is packed with natural beauty. But will it be enough to keep you here throughout the winter months? Only time will tell. 

In today’s economic climate, financial advisors are the go-to source for financial and retirement planning advice. But finding an Iowa-based financial advisor isn’t always easy. It’s important to choose someone you can trust, who makes you feel comfortable and whose skills are a good match for your individual needs. 

If you are looking for an Iowa-based, full-service financial firm you can count on, contact the Fiduciaries at Johnson Wealth and Income Management here today

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