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From what I know about 401k's, when it's time to retire, we take our 401k money and pay federal and state tax. Some states don't have taxes on 401k's — Florida is a good example. So many people move to Florida for a retirement, not to pay taxes (that's why people call it heaven's waiting room). The question is - how does it work if a US citizen permanently moves to another country for a retirement (retaining citizenship, but not living in any of the US states)? Are there any state taxes? If yes, then why?

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It essentially works the same. Some states don't have any income taxes at all (like Florida or Wyoming), some only tax income derived in the state, and some tax worldwide income (like New York or California), similarly to the Federal income taxes.

However, if you're living abroad (i.e.: you're a citizen or resident of a foreign country and you live there), you're not considered resident by most of the states (check with your state for specific definitions) for most, if not all, the time of your residency abroad. In such case - you don't pay state taxes, only Federal.

You have to remember that foreign income exclusion doesn't apply to the income from your 401k, so you pay the taxes as if you're in the US. You can not use foreign taxes credit as well (but depending on the tax treaty with the country you're moving to, your 401k income might not be taxable there). In some cases you may end up with double taxation: US will tax your 401k income as you're a US citizen and the income is derived from the US sources, and the foreign country will tax the income based on its own laws.

This is not a tax advice, and this answer was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

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