According to Benjamin Franklin, the only two things you can be certain of in life are death and taxes; I’m fairly certain this will not be changing anytime soon. In the state of Illinois, higher income taxes may become an ever larger part of your life thanks to discussions in the state legislature about taxing retirement account withdrawals.
About a quarter of the states in the U.S. do not tax retirement account withdrawals and as of this writing, the state of Illinois is one of them. This is one of the factors nearly-retired and retired Illinoisans consider when deciding where they plan to spend their retirement years. Even though the issue of taxing versus not taxing is a complicated one, the overriding reason for not taxing is not to overly-burden retirees on a fixed income.
With the rate of retirees steadily increasing thanks to Baby Boomers reaching retirement age at the rate of about 10,000 per day, discussions involving retirees and money is commonplace. Most people know at least one retiree who struggles to pay for their medication or who chooses to downsize to save money. Despite some retirees having money struggles, retirees are still a boon to an economy and make excellent residents. Many states, including Illinois, actually devote a large portion of their advertising dollars to luring retirees to visit and/or live in their state.
Illinois has always been seen as a good place to retire because of the lack of state tax on retirement account distributions (in addition to other perks like great food, art and culture). The lack of state taxes is also one reason why Florida and Nevada are so popular for retirees. Other states, like Iowa, which once imposed a state tax on social security disbursements, seem to have recognized the advantage of not taxing retirees and eliminated this tax in 2014. Although figures aren’t available to show whether the elimination resulted in an increase of the retiree population, for the purposes of this article, we’ll assume it did.
Getting Down to Brass Tacks
The tax status for Illinoisans taking distributions from retirement accounts and/or receiving a pension will be changing if some state legislators have their say. Although the idea has been floating around the Illinois legislature for some time, in 2015 the talk of imposing a state tax on pension income and retirement plan withdrawals amped up. Taxing retirement accounts was – and still is – seen by some Illinois state legislators as a way to help get out of a statewide pension and budget crunch.
The idea of taxing pension and retirement account withdrawals in order to keep the government’s pension promises lends itself to robust debates, both for and against. If, for example, the state of Illinois taxed pensions in order to keep paying their promises, retires would be forced to rely more on their savings and Social Security income – both of which would also be subject to state taxation. This would result in less spending thereby reducing contributions to the economy, which equates to lower tax revenue to taxing bodies.
Additionally, despite my earlier statement that Illinois is seen as a good place to retire, you would be hard pressed to find someone why says that Illinois is the best state to retire. It lacks the perpetual warm weather of southern states, and is missing an ocean view. When ranked against other states that are friendly to retirees by virtue of the no state tax, Illinois is usually not near the top of the list. This lends itself to the question of why lawmakers are willing to risk losing out on retirees by enacting this tax.
Should the number of people choosing to retire in Illinois fall because of an “enhanced” income tax, the lost money going into the economy on behalf of the retirees could be devastating. Retirees have more than money to offer a community too – they act as mentors and volunteers, fill part-time jobs, and create new businesses.
Of course the arguments both for and against taxing pensions and retirement accounts are much more complicated than what’s discussed here, but the purpose of this article is not to advocate for one side or the other. Instead, it is to help raise awareness of the issue and to encourage you to learn more about how the proposed tax may affect you and your retirement plan.
It should also be mentioned that there are other taxes besides state taxes on retirement disbursements that should be taken into consideration when deciding where retire. Your property tax bill might vary enough from one place to another to negate any state income tax on your retirement disbursement. For example, as Illinois has a comparably high property tax and high gas tax, it is worth researching how all of the taxes combined might affect you should the legislature decide to impose the additional tax.
After educating yourself, you are encouraged to reach out to your state representative to tell him or her how you feel about the issue. Don’t be surprised if you have to educate your representative about the issue as well.