What California does to a retirement withdrawal

Most states give retirees something. Some exempt Social Security. Some exclude a portion of pension or IRA income. Some have no income tax at all. California offers very little of this. A dollar withdrawn from a traditional IRA is taxed the same as a dollar of salary, at the same graduated rates, with the same brackets.

Social Security is the exception that matters most, and it is a real one. California does not tax Social Security benefits, even though the federal government taxes a portion of them for most people in our clients' situations. That inversion matters when you are deciding when to claim, because the state and federal answers push in slightly different directions.

The part people underestimate

The rates themselves are not the surprise. What surprises people is that California applies them to the whole of a traditional retirement account on the way out, and that the account has usually spent thirty years growing without anyone accounting for that. A balance that looks like a retirement fund is partly a deferred state tax liability, and the size of it is not visible on any statement.

What this changes about the planning

Two things, mostly. The first is that conversions during low-income years are worth more here than they would be somewhere else, because the state tax avoided is real rather than theoretical. The second is that the question of whether to leave the state stops being a lifestyle question and becomes a number, and the number is usually larger than people expect over a thirty-year retirement.

None of which means moving is right. Most of our clients want to stay, and staying is a legitimate choice that costs something you can quantify. Our job is to put the figure in front of you and then work on closing as much of the gap as possible from inside California, which is usually a conversion sequence, careful ordering of withdrawals, and attention to which assets sit in which accounts.