Do Not Move Just to Save Taxes: Real Financial Freedom Means Living Where You Want

Comment:

Teacher, thank you for your hard work. I would like to ask a question. I am 58 and plan to retire within 4 to 9 years. Because I am currently in a high-income stage and live in a place with a high 10% state tax, I put all of my 401(k) contributions into Traditional to save taxes immediately.

I plan to move to a no-state-tax state after retirement and gradually do Roth conversions during lower-tax years, in order to save state taxes and reduce federal taxes. Is this strategy correct? Do I need to switch to Roth contributions now?

James's Reply

In life, of course convenience and comfort should be the priority.

Moving for money is completely putting the cart before the horse. It is a fallen mindset: water flows downward; people should move upward.

For money, you become a slave to money.

You have a high income. Why are you still troubled by money? You should have the right to live wherever you want, eat whatever you want, and spend when you want, should you not?

You must have only recently discovered us. We do not use our own money to pay taxes. Did you not know that?

Comment:

@clec168 Teacher, thank you for your inspiration. Over the past two years, we have begun investing and planning for retirement. We started late, and our asset level is only small middle class. The high income I mentioned earlier is only high compared with my own past, not wealthy by any means.

Therefore, our retirement plan is very flexible. If the market is good, we expect to retire in four years. If the economy is poor, we plan to postpone it by five years. This is a dynamic adjustment based on our own financial situation.

James's Reply

Understood.

If your marginal tax rate is not in the highest bracket, and you have already accumulated a fairly large amount of pre-tax retirement account assets, then doing Roth conversions earlier is usually more beneficial.

In addition, when the assets in your stock account reach more than US$800,000, you can also begin making good use of a pledged asset line, or PAL. For example, with US$800,000 in assets, if you borrow 2% per year, you will have about US$16,000 available. If you borrow 10% at once, you will have US$80,000 in funds available. This is the advantage of using assets well to create liquidity.

In life, what you should think about is how to keep your assets growing and how to keep improving your quality of life. You should not move to a place that does not suit you, or even to a remote mountain area, just to save a little tax. These should not be the core direction of our life planning.

When the direction is right and the mindset is right, then giving time for compounding to work is what creates the chance to truly complete the life you want.