How Does California Tax Your Social Security Benefits?

If you want to retire in or to California, you may wonder how California will take your Social Security and other retirement benefits. There is some good news and some bad news here. The good news is that regardless of where you choose to retire in California, you will not owe state taxes on your Social Security benefits. However, California will still take a chunk of your other retirement income sources.

The ok news is that while California has a reputation as a high-tax state, you may or may not owe a high amount of taxes on other retirement income. How much you owe at the end of the day will depend on how much retirement income you have and how much proactive tax planning you (and your financial planner) have done to help you keep more of your hard-earned life savings.

California Does Not Tax Social Security Income

Great news for California retirees: the state does not tax Social Security retirement benefits. This means you could potentially live state-tax-free if you were retiring with just Social Security. Of course, most of California has quite a high cost of living, so retiring with Social Security as your sole source of income would be tough.

The maximum Social Security benefit in 2025 at age 70 is $5,108. A married couple might be able to double that if both spouses qualified for the maximum Social Security benefit and waited to claim until age 70. Doing so would put the couple in the 9.3% California tax bracket, assuming no other taxable income. Nontaxation of Social Security benefits would save them over $7,400 in 2025.

Taxes On Other Retirement Income In California

Your other retirement income (think pensions, IRA and 401(k)) withdrawals will be taxed like regular income. However, this income won’t be subject to payroll taxes that you may owe on your earned income. California tax brackets range from 1 to 13.3%.

While California has the highest marginal tax bracket at 13.3%, its progressive tax bracket may allow you to pay fewer taxes than other so-called lower-tax states. You will hit their highest tax bracket in many other states at much lower income levels than in California.

What Other California Taxes Could Hit My Retirement Income?

If you plan to generate some or all of your retirement income from a taxable investment account during retirement, you need to be aware of how California taxes capital gains. All capital gains in California, whether short-term or long-term, will be taxed as regular income at the state level in California.

Roth Conversions For California Retirees

Between how California taxes retirement income and capital gains, strategic Roth conversion can be an amazing way for California retirees to reduce their overall tax burden. This is often the case when considering your federal tax savings, but the benefits of tax-free retirement income via Roth conversion can be even more substantial for those looking to retire in California.

Your taxes owed will ultimately depend on your overall income, state of residence and what tax deductions you may be entitled to. Work with your tax planning-focused financial planner to help ensure you understand what your retirement income will look like after taxes are paid.