Boston Retirement Planning: Navigating Massachusetts Tax on Retirement Income

Boston offers retirees world-class healthcare, cultural institutions, and walkable neighborhoods. But Massachusetts\'s 5% flat income tax applies to most retirement income, and the 4% millionaire\'s surtax on income above $1 million can hit retirees with large one-time distributions. Strategic planning is essential to retire comfortably in the Hub.

Massachusetts Retirement Income Taxation

Massachusetts taxes 401(k) distributions, IRA withdrawals, and private pension income at the flat 5% rate. Government pensions (federal, state, and military) are fully exempt. Social Security is also exempt. For a retiree with $90,000 in annual 401(k) distributions, the state tax bill is $4,500.

The Millionaire\'s Surtax Trap

The 4% surtax on income above $1 million can catch retirees who take large lump-sum distributions, sell a home with significant gains, or exercise stock options in retirement. A $1.2 million distribution triggers $8,000 in surtax on top of the regular 5% tax. Spread large distributions across multiple years to stay below the threshold.

Roth Conversion Timing in Massachusetts

Converting traditional IRA funds to Roth while still working in Massachusetts means paying 5% state tax on the conversion. But if you plan to retire in Massachusetts, the conversion eliminates future state tax on those funds. For retirees planning to stay in Boston, systematic Roth conversions during lower-income years can save significantly over a 20-30 year retirement.

Boston\'s Healthcare Advantage

Boston is home to some of the world\'s best hospitals — Massachusetts General, Brigham and Women\'s, Dana-Farber Cancer Institute, and Beth Israel Deaconess. For retirees prioritizing healthcare access, this is an unmatched advantage that justifies the higher tax burden for many.