Until my recent move to Oregon, I was blissfully unaffected by state income tax. My previous home states, Alaska and Washington, were both free of this financial curse. I didn’t know how good I had it. My first few paychecks in Oregon sparked the tingling desire to crunch some numbers (numbers give me pleasure — don’t judge me.) My discovery about state income tax was a dire one:
Living in a state with income tax could deprive you of millions of dollars in your retirement years. Don’t believe me? Let’s partake in a little thought experiment…
Running the Numbers
Imagine you are an electrical engineer – mostly because I’m one and I control this thought experiment. At 22 years old, you are fresh out of college, bright eyed and bushy tailed. You’re offered two jobs — one in Washington, one in Oregon. You choose Oregon because you want to keep Portland weird and can’t stand the thought of pumping your own gas.
For the sake of this mind experiment, you will have an average career. $64,000 is your starting salary. You receive a 3.1% yearly pay raise, capping off at $100,000 per year, and you retire at the average age of 67.
If your entire career as an average electrical engineer is spent in Oregon, expect to pay, on average, around $7,350 per year in state income tax. That’s a total of $338,000 by the time you reach 67. Sickening isn’t it? That’s not all, folks… What if you would have taken that job offer in Washington – a state with no income tax – and invested that money in a mutual fund instead? With a conservative 8% annual return, you would have $2.7 MILLION DOLLARS at the age of 67. You could be missing out on all that money just because of the state you happen to live in.
As of 2019, there are only 9 states that don’t have income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, consider yourself lucky, and don’t squander the advantage you have at saving for retirement. As for the rest of us unfortunates, we’ll cringe every time we look at our paychecks and wish we were you.
State By State Comparison
For your benefit, I ran the numbers for each state based on the thought experiment above. For each case, except North Dakota and Ohio, I found that after investing the state income tax, by the time you reach 67, you’d be a millionaire. Check out the numbers for your state in the table below to see how state income tax affects your retirement savings.
| State | Total Paid Income Tax | Money at 67 (Millions) |
| North Dakota | $61,115 | $0.47 |
| Ohio | $119,478 | $0.93 |
| Pennsylvania | $131,982 | $1.07 |
| Arizona | $139,968 | $1.10 |
| Indiana | $138,861 | $1.13 |
| Louisiana | $146,788 | $1.14 |
| Rhode Island | $148,436 | $1.16 |
| New Jersey | $173,450 | $1.32 |
| New Mexico | $174,359 | $1.38 |
| Michigan | $174,797 | $1.41 |
| Alabama | $176,474 | $1.44 |
| Vermont | $195,056 | $1.50 |
| Mississippi | $188,965 | $1.51 |
| Oklahoma | $189,379 | $1.51 |
| Maryland | $190,448 | $1.53 |
| Missouri | $197,208 | $1.55 |
| Colorado | $199,048 | $1.62 |
| Iowa | $206,465 | $1.64 |
| Kansas | $210,228 | $1.67 |
| Maine | $214,351 | $1.69 |
| Kentucky | $209,148 | $1.69 |
| North Carolina | $214,280 | $1.72 |
| Utah | $212,803 | $1.73 |
| Illinois | $212,805 | $1.73 |
| Connecticut | $215,751 | $1.73 |
| West Virginia | $221,708 | $1.74 |
| Massachusetts | $219,254 | $1.78 |
| Delaware | $227,116 | $1.79 |
| Virginia | $224,967 | $1.81 |
| Nebraska | $232,237 | $1.83 |
| Georgia | $229,058 | $1.83 |
| Montana | $233,749 | $1.84 |
| New York | $235,343 | $1.87 |
| South Carolina | $243,897 | $1.93 |
| California | $254,641 | $1.93 |
| Washington DC | $250,480 | $1.93 |
| Arkansas | $247,595 | $1.96 |
| Minnesota | $249,395 | $1.97 |
| Wisconsin | $250,544 | $1.99 |
| Idaho | $252,636 | $2.01 |
| Hawaii | $307,658 | $2.45 |
| Oregon | $338,196 | $2.70 |
| Alaska | $0 | NA |
| Florida | $0 | NA |
| Nevada | $0 | NA |
| New Hampshire | $0 | NA |
| South Dakota | $0 | NA |
| Tennessee | $0 | NA |
| Texas | $0 | NA |
| Washington | $0 | NA |
| Wyoming | $0 | NA |
What State are you in? How much more could you be contributing towards your retirement savings by changing locations?
I used the site https://smartasset.com/taxes/income-taxes to find the state income taxes in the table above.
If you’re curious about my own path to financial independence, check it out here: My Fail Safe Plan to Early Retirement
I wonder how that compares to the sales tax I have paid. At least that’s more controllable by not spending…
There is a handy calculator for estimating how much you will pay in sales tax in Washington here: https://apps.irs.gov/app/stdc/stdc.html