Tax-Free Retirement Strategies in Texas
Texas is one of 9 states with no state income tax. This is a significant advantage—but federal taxes still apply. And they're substantial.
Texas Tax Overview
What Texas Doesn't Have
- ❌State income tax
- ❌State tax on retirement withdrawals
- ❌State tax on investment gains
- ❌State estate tax
What Texas Does Have
- •Property taxes (among highest in nation)
- •Sales tax (6.25% state + up to 2% local)
- •Franchise tax on businesses
The Federal Reality Remains
Even without state income tax, Texas residents face full federal taxation.
A Texas resident earning $500,000 still faces 35%+ federal taxes.
Why Section 7702 Matters in Texas
The 401K Trap Still Exists
Example: Texas resident with $2M 401K
- RMDs at 73: ~$75,000/year
- Federal tax on RMD (24%): ~$18,000/year
- Plus Social Security taxation increase
- Plus Medicare premium increase (IRMAA)
Tax-Free Access Is Still Valuable
Section 7702 provides:
- ✓No federal tax on growth
- ✓No federal tax on access (through loans)
- ✓No RMDs forcing taxable withdrawals
- ✓No impact on Social Security taxation
Every dollar accessed tax-free is worth more than a dollar from a 401K.
Texas-Specific Benefits
Superior Creditor Protection
Texas has some of the STRONGEST creditor protection for life insurance in the nation—cash value exempt, death benefits exempt, protected in bankruptcy, NO dollar limit.
Property Tax Offset Strategy
Texas's high property taxes create cash flow demands. IUL policy loans provide tax-free access for property tax payments with no penalties and flexible repayment.
Energy Industry Planning
Texas's energy sector creates volatile income patterns and large bonus years. Section 7702 allows capturing tax-free growth during high-income years.
Texas vs High-Tax States
Comparison: Texas vs California Resident ($400K income)
Even in Texas, Section 7702 saves 32% compared to taxable withdrawals.
California-to-Texas Migration
Before the Move
- 401K/IRA withdrawals = CA tax
- Roth conversions = CA tax
- Section 7702 access = tax-free
After the Move
- 401K/IRA withdrawals = federal only
- Section 7702 access = still tax-free
- CA "residency audit" risk for 401K timing
Section 7702 Advantage
Policy loans are tax-free regardless of which state you lived in when you funded, which state you live in when you access, or California's aggressive pursuit of former residents.
Serving Texas Clients
With expertise in energy sector compensation planning, Texas creditor protection optimization, California-to-Texas migration planning, and business exit planning.
Frequently Asked Questions
If Texas has no state tax, why do I need Section 7702?
Federal taxes still apply to all retirement account withdrawals. At 24-37% federal rates, tax-free access is worth 24-37 cents on every dollar. Plus, Section 7702 avoids RMDs that can push you into higher brackets.
Is creditor protection really that strong in Texas?
Yes. Texas has some of the strongest life insurance creditor protection in the nation with no dollar cap on the exemption. This makes IUL particularly valuable for Texas business owners and professionals.
What if I move from Texas to a high-tax state?
Section 7702 access remains tax-free regardless of which state you move to. Unlike 401K withdrawals, which become taxable in high-tax states, policy loans remain tax-free everywhere.
Should Texas residents still contribute to 401Ks?
Up to the employer match, yes—that's free money. Beyond the match, consider Section 7702 for tax-free capacity that isn't subject to RMDs and potential future federal rate increases.
No State Tax? Federal Optimization Still Matters
Even without state income tax, federal tax optimization is essential. Get a personalized analysis of how Section 7702 can help you keep more of what you earn.
Schedule Your Texas Tax Strategy Review →