The Grand Canyon State has been attracting more residents. The state saw a 0.89% population increase in 2023, and more than 7 million people call Arizona home — that includes retirees who are trying to stretch their money.
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Recent changes to state and federal tax codes will impact how much you have to pay in retirement. This guide will explore some changes you need to know about if you’re retired in Arizona.
Senate Bill 1358
Senate bill (SB) 1358 is a recent change to the Arizona tax code that went into effect earlier this year. Laura DiFiglio, CFP, ChFC, a financial advisor with Northwestern Mutual, explained what this new law means for retirees.
“Arizona Governor Katie Hobbs signed into law SB 1358 on March 29, 2024,” she said. “This law allows participants of most qualified pension and annuity plans to elect to have state income tax withholding from lump-sum distributions that are not regularly scheduled. Prior law allowed for state income tax withholding only on periodic payments or regularly scheduled payments. This can help individuals with these assets better manage their tax payments.”
State income tax withholding allows you to gradually pay taxes when you tap into your retirement account, pension or annuity plan. That way, you won’t have a big bill waiting for you in April. However, you’ll have less cash in the present if you opt for state income tax withholding. SB 1358 gives taxpayers the flexibility to opt out at any time.
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Secure 2.0 Act
DiFiglio also pointed to a recent federal policy for Arizonans who are planning their retirement. It impacts the minimum age for required minimum distributions (RMDs).
“When an individual reaches a certain age, they are required to take a certain amount out of their accounts,” she explained. “For those with a hefty sum in pre-tax accounts, this could cause a larger than anticipated tax burden. RMDs used to start at age 72, but in 2023, Secure Act 2.0 increased that age to 73, with a further increase to age 75 in 2033. Anyone born between 1951 and 1959 must start their RMDs at 73 and anyone born after 1960 will start their RMDs at age 75.”
A higher RMD age isn’t the only benefit the Secure 2.0 Act offers. Jennifer Kohlbacher, director of wealth strategy at Mariner, explained additional ways the new policy will affect retirees.
“Under Secure 2.0, a few key provisions go into effect on Jan. 1, 2025. With Secure 2.0 came a voluntary catch-up contribution provision. Beginning in 2025, participants in 401(k), 403(b) and other particular plans offer a higher catch-up for those turning 60-63,” she said. “For 2025, the catch-up limit for those ages 60-63 is $11,250. For those still working on the side, this is a way to defer income tax on earnings.”
Arizonan Retirees Can Keep Property Tax Growth at Bay
Higher housing prices in some states have caused property taxes to increase significantly. This unexpected rise in property taxes has forced some people to relocate, but Arizona has a solution that protects seniors from this trend.
“In Arizona, seniors — age 65 [and older] — who have owned a primary residence for at least three years can apply for the Senior Property Valuation Protection,” Kohlbacher explained. “As long as the other requirements — income limits and time residing in the home — are met, the property value is frozen.”
The property will still become more desirable as more people move into the area. However, a frozen property value prevents property taxes from climbing higher.
Is Arizona a Good State for Retirees?
It’s easy for Arizonans to wonder if their state is the best option for retirement. Similarly, U.S. citizens in other states may wonder if relocating to Arizona during their retirement years is worth the effort. Here’s what DiFiglio thinks about the Grand Canyon State’s flexibility for retirees.
“Apart from generally decent weather, Arizona may be a good choice financially speaking for those looking to retire,” she said. “It has a flat 2.5% individual state income tax, which differs from many states that have progressive tax brackets that model after the federal tax brackets. This means if you show higher income, you will not be taxed more than your neighbor who shows a lower income on the state side of taxes.”
Arizona may also be a favorable state for people who have significant capital gains in their retirement portfolios.
“Arizona also has a flat 2.5% capital gains tax rate — so the same as their state income tax rate. This would be beneficial to those who have large amounts in their non-qualified accounts that they are planning to deplete for retirement purposes,” DiFiglio explained.
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This article originally appeared on GOBankingRates.com: 3 Tax Laws Arizona Retirees Need To Know About for 2025
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