If you’re retired or nearing retirement, you may be considering what state you might want to move to in order to maximize your after-tax income. Obviously there will be family, climate and lifestyle considerations that are going to be different for everybody. And there are cost of living factors to consider as well. But taxation of retirement sources of income, including IRAs and Self-Directed IRAs and 401(k)s varies among the different states, and warrants serious consideration on the part of Self-Directed IRA enthusiasts.

Roth vs. Traditional Self-Directed IRA

For the most part, state income taxes won’t matter to you to the extent you will rely on income from a Roth IRA and for a few of you, for Roth 401(k)s. However, state income tax rates will still matter, in many cases, when it comes to Social Security benefits, pension income, annuity income, and income from other traditional income generators such as bonds and rental real estate, including REITs.

One possible strategy is to convert a traditional IRA balance to a Roth IRA. You’ll have to pay income taxes on any amounts you convert to a Roth, but any growth after that point is generally tax-free (with the exception of possible unrelated business income taxes on gains within your IRA that are attributable to borrowed money!)

If you live in a high-tax state, you are sufficiently mobile, however, and the amount you are converting is large, you may consider moving to a state that does not have a state income tax, establish domicile there, and then do the conversion. You will still pay federal income tax. But you or your heirs  would have to pay federal income tax sooner or lataer anyway when those IRA balances are eventually distributed. But money distributed from your new Roth IRA account would be free from state income tax and any future federal income tax on the growth in the account.

No-Income Tax States

There are currently seven states that don’t charge individual income tax at all, and are therefore great places to retire with a Self-Directed IRA or other taxable retirement income, or to live in long enough to convert to a Roth IRA free of state income tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming

In addition, New Hampshire and Tennessee only tax income from interest and dividends, so these could be good choices, too, depending on your situation.

You can further broaden your list of states under consideration by looking at states that do have an individual state income tax, but that exempt most or all retirement income. These states include Hawaii, Illinois and Mississippi.

Worst states for IRA and Self-Directed IRA Retirees

The least friendly states for people retiring on IRAs and Self-Directed IRAs are the states that have individual state income taxes on all retirement income and do not exclude any portion of retirement income from state income taxes:

• California
• Nebraska
• North Carolina
• North Dakota
• Rhode Island
• Vermont

If you’re considering moving to one of these states in retirement, you may consider converting IRA balances to a Roth before you move there, so the high state income taxes won’t affect you.

There are other tax items to consider. First of all, even though Washington doesn’t charge an individual income tax, sales taxes are fairly high. (Tip). If you live far enough south, you can cross into Oregon and do most of your shopping there, and avoid the high Oregon sales taxes. Washington hates that, but that’s not your problem!