If you're planning for retirement or currently living in Tennessee, you might wonder how the state taxes your retirement income, especially your Thrift Savings Plan (TSP) withdrawals. Retirement income tax policies can vary widely between states, and knowing how Tennessee handles them can significantly impact your financial planning.
Here’s an overview of whether Tennessee taxes your TSP and what else you should know about the state’s tax-friendly policies.
Tennessee's Tax Policy on Retirement Income
Tennessee is widely known as a tax-friendly state, especially for retirees. The most critical point to note is that Tennessee does not levy a personal income tax on traditional forms of retirement income. This includes:
- Social Security benefits
- Pensions
- Distributions from retirement accounts like IRAs, 401(k)s, and TSPs
Yes, this means that your TSP retirement account distributions are not subject to Tennessee's income tax.
Photo by Mikhail Nilov
But Is Federal Tax Still Applicable?
Even though Tennessee doesn’t tax your retirement income at the state level, you’ll still need to pay federal income tax on your TSP withdrawals. The Thrift Savings Plan, being a federal tax-deferred account, requires you to report distributions as taxable income to the IRS unless you’ve made Roth contributions.
In short, the lack of state income tax in Tennessee doesn’t automatically mean you’re entirely tax-free. Be sure to consult a tax professional to factor federal obligations into your plans.
What Taxes Does Tennessee Have?
While Tennessee may not tax income, it collects revenue in other ways, such as:
- Sales Tax: Tennessee has one of the highest average sales tax rates in the U.S. at 7% statewide, with local jurisdictions often adding additional sales taxes (making it a practical total of 9-10% in many areas).
- Grocery Sales Tax: Groceries are taxed at a reduced but notable rate of 4%.
- Property Taxes: Property taxes in Tennessee are relatively low compared to national averages, making the state even more appealing for retirees.
These taxes might not directly impact your TSP income, but they’re essential to consider as part of your overall retirement budget.
How Tennessee Compares to Other States
Tennessee is part of a group of states that either have no income tax or don't tax retirement income. Other states in this group include Florida, Texas, Nevada, and Wyoming. However, most states tax some form of earned income or retirement distributions, so Tennessee’s policies make it an attractive option for retirees who want to keep more of their money.
What About Other Types of Retirement Accounts?
In addition to not taxing TSP distributions, Tennessee also excludes other types of retirement income from taxation, including:
- Traditional and Roth IRAs: Withdrawals are not taxed at the state level.
- Pensions: Both public and private pension payouts are tax-exempt.
- 401(k) Plans: Similar to TSPs, distributions from 401(k)s are not taxed.
These benefits make Tennessee a preferred destination for individuals who want to stretch their retirement dollars further.
Planning for Local Taxes
While Tennessee’s lack of income tax is a significant advantage, local taxes such as property and sales taxes can influence your financial situation. Before deciding to relocate or budget for retirement here, it’s wise to research the specific tax rates in the county or city where you intend to live.
Benefits for Federal Employees and Veterans
For federal retirees and veterans, Tennessee has an additional draw. Along with not taxing TSP distributions, the state also doesn’t impose taxes on military retirement pay. This combination makes it financially advantageous for those who served in the armed forces or worked in federal government positions.
Key Takeaways
- No State Tax on TSP: Distributions from your TSP retirement account are safe from Tennessee’s state income tax.
- Federal Taxes Still Apply: Don’t forget to account for the IRS, as federal taxes remain applicable.
- Other Taxes to Watch: Tennessee makes up for its lack of income tax through higher sales and local taxes. These can affect your overall expenses.
- Tax-Friendly for Retirees: Tennessee is one of the most retirement-friendly states, not taxing Social Security, pensions, or withdrawals from 401(k)s, IRAs, and TSPs.
Final Thoughts
Tennessee’s tax policies make it an excellent choice for retirees looking to minimize their tax burden. With no state income tax and no taxes on TSP distributions, your retirement savings can go much further. Just remember, federal taxes and other state-level costs like sales tax still apply, so it’s essential to plan accordingly.
If you’re considering Tennessee as your retirement home or need guidance on managing your TSP withdrawals, consulting with a financial planner or tax professional is always a smart move. They can help you maximize your savings and prepare for any federal or local tax obligations.