Alessandra Malito at MarketWatch answered a reader with a $2.3 million nest egg, about $2 million of it in 401(k) plans, planning a 4% withdrawal rate and a split life between a $200,000 Florida condo and a home in New England. The question was how to minimize taxes across two states.
My contribution was about timing and domicile, because that is where these plans go wrong. Where you are domiciled on December 31 can determine which state taxes your entire retirement income for that year. Florida has no state income tax. New England states do, and Massachusetts, for example, will continue to treat you as a resident until you have actually cut the legal ties. That means the driver's license, the voter registration, the primary residence declaration, the time-in-state records. A condo purchase by itself does not change anything.
The second layer is sequencing the withdrawals around the move. A large 401(k) distribution taken before the domicile change is taxed by the old state. The same distribution taken after a clean, documented change is not. For a couple drawing four percent from $2 million, the difference is real money every year.
Get the residency question settled first. The withdrawal strategy depends on the answer.
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