Do you envision a California retirement? Whether you’re already a resident or plan to move to the area, there are a few things to consider now to enjoy a comfortable retirement. While a popular retirement destination, a primary concern for California retirees is navigating the state’s high taxes. However, with proactive planning, it’s still possible to have a comfortable — and tax-efficient — retirement in the Golden State. Before retiring in California, let’s review what you should consider and strategies you can employ now to reduce tax surprises later.
Are Retirement Taxes High in California?
As a pre-retiree, it’s the perfect time to understand the intricacies of California’s tax system, as rates change based on the type of income and your residency and filing type. Here’s a snapshot:
Income Tax: The state has the highest income tax rate in the country topping out at 12.3% (as of 2025).
State and Local Sales Tax: Retirees should consider that California has the highest state sales tax, 7.25%, with additional potential district sales tax ranging between .10% and 2%.
Sales Tax Exemption: Some food products, prescriptions, and medical devices are exempt from state sales tax.
Tax Brackets: California has nine steep income tax brackets, meaning income from things like required minimum distributions (RMDs) from retirement accounts can quickly push you into a higher state tax bracket.
Cost of Living: High taxes combined with California’s high cost of living make it critical for pre-retirees to consider how to manage their current and anticipated expenses, income, and withdrawal plans in retirement.
What Are the Different Types of Retirement Accounts and Their Tax Implications?
Explore how various retirement income sources are taxed to help you prepare and manage California’s high taxes and cash flow.
Retirement Accounts that Reduce Your Taxable Income
Pre-tax contributions to the following accounts are often tax-deductible, which reduces your taxable income and allows your investments to grow tax-deferred until retirement. Maximizing pre-tax contributions shields that portion of your wages or self-employed earnings from taxes, which helps lower your overall tax bill.
Consider that tax is due on tax-deferred accounts when you withdraw money from the accounts. If those “pre-tax” retirement accounts are your main source of income early in retirement, you may find yourself in a high tax bracket.
401(k) Plans: Contributions are tax deductible, reducing your taxable income in the year you contribute. Withdrawals are taxable in retirement
Traditional IRAs: Contributions may be tax deductible, depending on your income level. Withdrawals are taxable in retirement.
SIMPLE/SEP IRAs for Self-Employed Individuals and Small Business Owners: Contributions may be tax-deductible, depending on your income level and participation in an employer-sponsored plan. Withdrawals are taxable in retirement.
Health Savings Accounts (HSAs): HSAs offer a triple tax advantage — contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free. HSAs can be a valuable tool to help retirees manage healthcare costs in retirement, especially in a state like California where those expenses can be high.
After-Tax Retirement Accounts
Roth IRAs: While contributions don’t reduce your taxable income, you will benefit from tax-free growth and qualified withdrawals in retirement. They also don’t trigger RMDs in retirement, which often increases taxable income for retirees. Note there are income limits for contributions.
Roth 401(k)s: Similarly, these accounts leverage tax-free growth and withdrawals, however, there are no income limits on contributions and RMDs do apply at the appropriate age.
California-Specific Tax Implications
Early Withdrawals: If you make a withdrawal from your retirement accounts before 59½, you will be subject to a 2.5% penalty in California and a 10% penalty at the federal level.
Property Taxes: While property taxes for long-time residents are low, newcomers face higher property taxes, with some exemptions available.
State Income Tax: Retirement income sources, such as pensions, 401(k) distributions, and IRA withdrawals, are subject to California State Income Tax. Roth IRAs are not subject to state income tax.
Senior Head of Household Credit: Seniors over 65 meeting specific criteria may qualify for this income tax exemption.
Estate and Inheritance Taxes: The state does not tax estates or inheritances. However, you should plan for federal taxes.
Social Security Benefits: Social Security is only taxed at the federal level, not at the state level.
Social Security Disability Benefits: Social Security Disability Insurance is exempt from state taxes in California.
How Can I Navigate California’s High Taxes in Retirement?
You can keep taxes manageable and ensure financial well-being by engaging in proactive planning to minimize taxes. Here are a few strategies you can consider now and discuss with an advisor to help position yourself for lower taxes and ensure your family is well-cared for in retirement:
Roth Conversion: Creating tax-free income by performing a Roth conversion is particularly effective in managing California’s high state taxes. Ensure you plan to pay taxes at the time of conversion but by converting your traditional IRA to a Roth IRA, your funds will grow tax-free, and withdrawals in retirement will also be tax-free.
Mega Backdoor Roth: This strategy involves making after-tax contributions to a 401(k) and converting those contributions to a Roth IRA. It is ideal if you’re currently in a lower tax bracket or can delay receiving income. A tax professional can help you determine the best timing.
Charitable Giving: Charitable contributions, using donor-advised funds and other strategies, may be tax deductible. Strategically plan year-end giving or lumping your gifts to maximize tax savings.
Tax-Efficient Withdrawal Strategy: A smart withdrawal plan can maximize your retirement funds and improve your financial situation. How and when are critical when tapping into those retirement accounts, as each comes with its own tax rules. A well-thought-out plan can minimize your tax burden as you strategically withdraw funds.
Tax-Efficient Investments: Unlike retirement accounts, there are no contribution limits on tax-advantaged investments, such as:
- Municipal Bonds: Earn interest often exempt from federal taxes (and sometimes state and local taxes).
- HSAs: Triple tax benefits — contributions are pre-tax with growth and withdrawals for qualified medical expenses that are tax-free.
- 529 College Savings Plans: Contributions grow tax-free, and withdrawals for education expenses are also tax-free.
Note: Unlike retirement accounts, you won’t get an upfront tax break, and you’ll need to pay taxes on earnings. However, you may qualify for certain credits or other tax benefits depending on the type of investment.
Capital Gains: Short-term capital gains for assets held for less than one year are taxed as ordinary income, while long-term capital gains — assets held for more than one year — are taxed at lower rates. Holding assets for the long term can be a simple but powerful way to lower your tax liability.
Looking to Maximize Your Retirement in California? Connect With Blankinship & Foster
Whether retiring in California is a lifelong goal or you’re just planning to stay close to the grandkids, deciding to retire in California is a highly personal choice. It comes with many advantages, but it also presents some unique financial and tax-planning challenges. At Blankinship & Foster, we specialize in helping retirees create an integrated plan focused on the financial and life outcomes they really want. We consider all the important pieces of the retirement puzzle, including taxes. Contact us if you’d like to discuss scenarios or to begin planning toward your ideal retirement.