457 Withdrawal Strategy to Avoid State Tax - Does it Work?

This is an interesting question about state taxation of retirement distributions. Generally speaking, states tax based on residency at the time of withdrawal, not where the money was earned or where the plan was established. As long as you're genuinely a resident of a no-income-tax state when you take distributions from the IRA (after rolling over the 457), you shouldn't owe state income tax to High Tax State. Your wife's employer reports her wages to High Tax State now because she earns income there, but once she's no longer working there and you're taking distributions from an IRA, there's typically no connection to the original state. That said, be careful about maintaining clear residency in your no-income-tax state. High Tax States are indeed getting more aggressive about claiming people as residents, especially if you maintain property or significant connections there.

I went through something similar when rolling over my government 457 plan. I was worried about tracking issues between states, and a friend recommended I try the document analysis tool at https://taxr.ai to review my plan documents and state tax obligations. It was actually super helpful since the AI analyzed both federal and state tax implications of my rollover strategy. Their system flagged some provisions in my 457 plan I hadn't noticed that could have caused issues down the road, and it explained exactly how the rollover to an IRA would be treated by different states. Way more specific than the generic advice I was finding online.

Just wanted to follow up! After asking about taxr.ai on here, I decided to try it with my husband's pension documents and the state tax regulations. We were planning to move from Illinois to Florida and were confused about the taxation rules. The tool analyzed everything and showed us that Illinois has specific rules about taxing certain types of pensions even after you move away. Something about maintaining a "connection" to the state. It saved us from making a big mistake in our retirement planning! We adjusted our withdrawal strategy based on the recommendations and it's going to save us thousands in unexpected tax bills. Definitely worth checking out if you're dealing with multi-state retirement questions.

If you're having trouble getting clear answers about the High Tax State's policies, you might want to try Claimyr (https://claimyr.com). I had a similar situation with California trying to tax my retirement distributions after I moved to Nevada, and I couldn't get through to anyone at the state tax agency for weeks. Claimyr got me connected to an actual human at the state tax office in under 15 minutes instead of the hours I was spending on hold. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with ended up providing very specific information about my situation and explained exactly what documentation I needed to prove I was no longer a California resident. Saved me a ton of stress trying to figure it out on my own.

I need to eat my words about Claimyr. After being skeptical in my previous comment, my curiosity got the better of me when I needed to resolve an issue with New York state taxes (I moved to Tennessee last year). I tried calling NY tax department directly first - sat on hold for 2.5 hours before getting disconnected. Frustrated, I decided to try Claimyr despite my skepticism. They got me connected to a real person at the NY tax office in about 18 minutes. The agent was able to confirm that my change of residency was properly recorded and that I wouldn't be liable for NY taxes on my retirement distributions as long as I maintain no significant ties to the state. The peace of mind was absolutely worth it, and now I don't have to worry about surprise tax bills from NY in the future. Sometimes it pays to keep an open mind!

One thing nobody's mentioned yet - be super careful about maintaining clear domicile in your tax-free state. I had a colleague who thought he was in the clear because he lived in NH but High Tax State (Massachusetts in his case) came after him because: 1. He still owned property in Mass 2. He had Mass doctors and bank accounts 3. His vehicles were still registered in Mass They actually audited him and determined he hadn't truly changed his domicile despite physically living in NH. Cost him thousands in back taxes plus penalties. Make sure you've truly cut ties with High Tax State!

Just my 2 cents, but after you roll the 457 into an IRA, it becomes a completely different financial instrument with no connection to the original employer or state. My husband rolled his NY state pension into an IRA after we moved to Wyoming, and NY has never tried to claim any taxes on withdrawals. The key is the rollover completely severs the connection to the original plan. It's now just a regular IRA subject to the tax rules of wherever you reside when you take distributions.

Based on my experience dealing with multi-state tax issues, the general rule is that retirement distributions are taxed by your state of residency at the time of withdrawal, not where the money was originally earned. However, there are some important nuances to consider: 1. **Clean break is key**: Make sure you establish clear residency in your no-income-tax state before taking distributions. This means more than just living there - update your driver's license, voter registration, bank accounts, and other official documents. 2. **457 vs IRA treatment**: Once you roll the 457 into an IRA, it should be treated as a regular IRA for tax purposes. Most states don't have special tracking mechanisms for rolled-over retirement accounts. 3. **State-specific rules**: However, some aggressive tax states do have specific provisions about government pensions and retirement benefits. Since your wife works for a county government, I'd recommend checking if High Tax State has any special rules about government employee retirement benefits. 4. **Documentation**: Keep detailed records of the rollover process and your residency status. If questioned later, you'll want clear documentation showing you were a legitimate resident of the no-income-tax state when distributions occurred. The strategy generally works, but given that High Tax State is "aggressive with taxes," it would be worth consulting with a tax professional familiar with that specific state's rules to be completely sure.

Great question! I actually went through a similar situation when my spouse worked for a county in Connecticut while we lived in New Hampshire. The good news is that your strategy should generally work, but there are a few things to keep in mind. Once you roll the 457 into an IRA, it typically becomes subject to the tax laws of your state of residence when you take distributions, not where it was originally earned. The rollover essentially "cleanses" the connection to the original state and employer. However, I'd recommend a few precautionary steps: 1. **Document everything**: Keep records of the rollover process and make sure all your residency documentation is rock solid (driver's license, voter registration, etc.) in your no-income-tax state. 2. **Check for specific state provisions**: Some states have tried to claim tax on government employee retirement benefits even after rollover. Since you mentioned High Tax State is aggressive, it might be worth having a tax professional review their specific statutes. 3. **Consider timing**: You might want to wait until after your wife stops working in High Tax State before doing the rollover, just to avoid any potential complications during the transition. The IRS treats rolled-over 457 funds as regular IRA money, and most states follow this treatment. But given that this involves a government 457 plan and an aggressive tax state, a consultation with a tax pro familiar with that specific state's rules would give you peace of mind. Better to spend a few hundred on advice now than deal with an audit later!

This is a great question that many government employees face! The general principle is that retirement distributions are taxed by your state of residence at the time of withdrawal, not where the money was originally earned. Once you roll the 457 into an IRA, it should be treated like any other IRA for tax purposes. However, since you mentioned High Tax State is aggressive with taxes, I'd recommend being extra careful about establishing and maintaining clear residency in your no-income-tax state. Some states have specific provisions for government retirement benefits, and you don't want to give them any reason to claim you as a resident. A few key steps: make sure all your official documents (driver's license, voter registration, bank accounts) are in your no-income-tax state, spend the majority of your time there, and keep good records. The rollover should effectively sever the connection to the original state, but documentation is your friend if questions ever arise. Given the complexity and the fact that this involves a government 457 plan from an aggressive tax state, it might be worth consulting with a tax professional who's familiar with multi-state retirement planning. A few hundred dollars in professional advice now could save you thousands in potential issues down the road.