In addition to its well-known lifestyle attractions Hawaii has a strong tax inducement for moving there during retirement: pension payments are exempt for state income tax purposes.
Settling in Hawaii may not be attractive to the wealthiest Americans (the top bracket of 11% is tied with Oregon for the highest marginal rate), but middle-income retirees with traditional pension plans will hardly be nicked at all. Distributions from employer-funded pension plans are exempt, as well as distributions from IRAs that hold employer-funded lump-sum pension payments. According to the example in p. 13 of the Hawaii instructions, even Roth conversions from such rollover IRAs are exempt.
Payments from deferred compensation plans, such as IRAs and 401(k)s, that have been set up with the taxpayer's own funds are not tax-exempt.
Comments: 1) I've been declaring Roth conversion income on my tax returns during the past couple of years, and a good portion of it would have been exempt under the Hawaii rules. Yes, I should have returned to my home state years ago and left woe-begotten California; 2) Who's got defined benefit pensions any more? Retirees from old-time employers, many of them unionized, and governments. Hawaii has attracted and continues to attract this demographic. Another reason that it will remain a stronghold of the Democratic Party for years to come.
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