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Retirement Planning in Pennsylvania: Don't Miss These Tax Breaks & Hidden Gems

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Retirement is closer than you think and you're wondering what your life would look like after work.

It is a big milestone and an important decision which requires careful thought and planning.

And what can be better than the Keystone State?

So Pennsylvania's got you picturing lazy days fishing in the Poconos, exploring Philly's historic sites, or just relaxing on your porch swing?

Without the right plan, it can be extremely tough. It's time to start thinking about how you'll make those dreams a reality. That's what we're going to cover today.

You've probably already heard about the IRAs, 401ks, and maybe even Reverse Mortgages in Pennsylvania

Pennsylvania is one of the best places to retire in 2024. Here is what you need to know about retiring in Pennsylvania.

Current Retirement Landscape in Pennsylvania

While each state has a different average retirement balance, Pennsylvania stands at 13 out of 51. Pennsylvania is quite tax-friendly for retirement plan income.

Moving on to the most searched questions; "What is retirement age in PA"? And "Is Pennsylvania a good place to retire?" 

What Is The Retirement Age In Pennsylvania?

The retirement age in Pennsylvania is 64. However, a fraction of the population retires as early as 55.

Several state-specific retirement programs and elder care services include modern retirement homes in Pennsylvania. 

Is Pennsylvania A Good Place To Retire?

Yes, Pennsylvania is regarded as the sixth-best state in the US to retire. The cost of living is also relatively low in Pennsylvania compared to neighboring states like New York and New Jersey, making retirement more affordable. 

However, with rising inflation worldwide, retirees must ensure their savings keep pace. This will help them maintain a steady standard of living after retirement. 

Does Pennsylvania Tax Retirement Income?

No, Pennsylvania does not tax retirement income and pensions.

One of the biggest perks of retiring in Pennsylvania is that the state does NOT tax most types of retirement income. This includes:

  • Social Security benefits
  • Distributions from retirement accounts like 401(k)s, 403(b)s, and IRAs
  • Pension income (if you're over 60 years old)

What's more? Pennsylvania has no inheritance tax or estate tax, so your heirs won't face a tax bill when they inherit your assets.

What Taxes do Retirees Have To Pay In Pennsylvania?

While Pennsylvania does not tax retirement income there are some taxes you have to pay. This includes:

  • Sales Tax: Pennsylvania has a 6% state sales tax, which is one of the lowest in the country. Some goods and services are exempt from sales tax, including most food, clothing, and prescription drugs.
  • Property Tax: If you own a home, you'll be subject to local property taxes. Rates vary depending on the county and municipality, so it's important to factor this into your budget.
  • Local Income Tax: Some municipalities in Pennsylvania levy a local income tax on earned income. However, this tax typically doesn't apply to retirement income.

Retirement Plans Available in Pennsylvania

The state offers different retirement plans to accommodate the requirements of different citizens. Some common plans include:

1. Employer-Sponsored Plans

Working 9-5? Your employer might have you covered.

401(k)s In PA

If you're working for a company, chances are, they offer a 401(k). Most employers provide their employees with a 401(k), a tax-advantaged savings account. You contribute a portion of your paycheck and your employer matches the contributions from their side. For instance, if you put in 5% of your salary, your company might happily match that. Which means double the savings.

There are two types of 401(k) plans: traditional and Roth.

  • Traditional 401(k): Here, you contribute your income pre-taxes, which reduces your taxable income for the year. It can be a great way to reduce your tax bill while also saving up for your future. However, you'll have to pay taxes when you withdraw for retirement.
  • Roth 401(k): This lets you pay taxes on your contributions now, but the retirement withdrawals are completely free of taxes. Great choice if you expect to be in a higher tax bracket in late years.

401(k) is an amazing way to safeguard your retirement.

403(b) In PA

Similar to the 401(k) plans, this one specifically caters to those of you working in the non-profit sectors or public schools. It works similarly to a 401(k), and offers tax-advantaged savings and also potential for employer contributions.

Great for teachers, healthcare workers and others in the non-profit sector to secure retirement.

2. Pennsylvania State Employees Retirement System

If you work for the Pennsylvania state, you're in luck! The State Employees Retirement system provides a defined benefit pension plan. This guarantees you a monthly income in retirement based on your years of service and the salary you received. Which basically means a reliable income stream for your financial security throughout your retirement years!

Individual Retirement Plans in Pennsylvania

1. Individual Retirement Account(IRA)

This is a great option for self-employed people, or people who run small businesses. This allows you to put a set amount in their account. Your hard-earned money is invested in stocks and businesses, which earn you money in interests over time.

However, you incur a penalty of 10% if you withdraw before 59 ½ years. Both Traditional and Roth IRAs are pretty popular in PA.

  • Traditional IRA: This one allows you to get immediate tax benefits. Your contributions are tax-deductible, which reduces your tax liability and your earnings grow without tax until you decide to withdraw them in retirement.
  • Roth IRA: Similar to Roth 401(k), you pay taxes on your contributions now, but withdrawals in retirement are tax-free. Great option if you expect to be in a higher tax bracket down the line.

Other Plans

1. Pensions in PA

Pensions have become far less common than they were once, but they still exist and still offer a guaranteed income stream in retirement. A pension fund is a set amount of money a government employee gets after retirement.

The state releases this money to help maintain a good standard of living for its employees. There are currently more than 1,574 pension plans in Pennsylvania, with over $10,754,765,000 in total contributions.

2. Annuities

This is a financial investment that can provide a great source of income in retirement. You buy an annuity with a lump sum and your insurance provider company pays you back in regular installments, either for a specified period or throughout your life.

3. Reverse Mortgages In Pennsylvania

Reverse Mortgages are an amazing option to explore. If you're 62 or older, you can get significant benefits.

They allow you to borrow substantial funds against your home and receive funds as either lump sum, monthly fixed payments or even a line of credit. You can tap into your home's value and supplement your retirement income.

Reverse Mortgage as a Retirement Strategy

Reverse mortgage is an excellent retirement strategy for senior homeowners. While maintaining your social security and personal savings is crucial, reverse mortgage equity can make your retirement even more comfortable. Most senior citizens do not want to live in retirement homes in Pennsylvania. So, with the help of reverse mortgage equity, they can also rightsize into a new home. 

This amount can also be used to pay the mortgage on a new, smaller home suitable for your needs.

But what is a reverse mortgage?

Simply put, it is a scheme designed for homeowners above the age of 62, allowing them to borrow funds against their home's value.

"But wait...I don't want to sell my house."

You don't have to, you can claim all the benefits without selling your house. Instead of paying the lender, you receive money from the lender. The money is later paid off when the house is sold, or the homeowner passes away. There are two different types of reverse mortgages.

1. Home Equity - Conversion Mortgages (HECM) 

HECM is the most common type of reverse mortgage system, approved by the Federal Housing Administration (FHA). It is eligible for homeowners above 62, whose house is their primary residence.  However, there is a limit to the amount you can withdraw. Currently, the loan limit is $1,149,825 for 2024. 

2. Jumbo Reverse Mortgages.

The Jumbo reverse mortgage scheme is like HECM but for bigger houses. It is eligible for citizens 62 and above with high-value properties as their primary residence. However, it is not FHA-approved. 

The current loan limit for jumbo reverse mortgages is $4 million. This amount depends on the size and value of the recipient's house.

Looking for a Jumbo Mortgage in Pennsylvania, you can contact us and get a good head start!

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