Retirement Planning in San Francisco: Beating California\'s Tax on Retirement Income

California is one of the least retirement-friendly states for taxes. The state taxes 401(k) distributions, IRA withdrawals, and pension income at full ordinary income rates — up to 13.3%. Only Social Security is exempt. For San Francisco retirees with $120,000 in annual retirement income, California state tax alone can exceed $7,000 per year.

Why Roth Accounts Are Essential in California

Roth IRA and Roth 401(k) contributions are made with after-tax dollars, but all withdrawals in retirement are completely tax-free — including from California state tax. For Bay Area tech workers in their peak earning years, maximizing Roth contributions now creates a tax-free income stream that California cannot touch in retirement.

Mega Backdoor Roth Strategy

Many Bay Area employers like Google, Apple, and Meta offer after-tax 401(k) contributions with in-plan Roth conversions — the mega backdoor Roth. This allows you to contribute up to $69,000 total to your 401(k) in 2026, with the after-tax portion converting to Roth. Over a 20-year career, this can build a $1M+ tax-free retirement fund.

California\'s Tax on Stock Options in Retirement

If you exercise stock options or sell RSUs after retiring but while still a California resident, the state taxes the full gain. California also claims the right to tax stock options granted while you were a California resident, even if you exercise them after moving to another state. Plan your equity compensation timeline carefully.

The California Exit Strategy

Many San Francisco professionals plan to retire in tax-friendly states like Nevada, Washington, or Texas. If this is your plan, ensure you establish residency before selling large stock positions or taking significant retirement distributions. California\'s Franchise Tax Board aggressively audits former residents who claim to have moved.

Health Care Costs in Retirement

San Francisco\'s healthcare costs are among the highest in the nation. Budget $15,000-$25,000 per year per person for healthcare in early retirement (before Medicare at 65). HSA funds accumulated during working years can cover these costs tax-free — another reason to maximize HSA contributions now.