Two retirees with identical $1.5 million portfolios generating $80,000 in annual taxable income can see a difference of about $7,440 per year in spendable income simply because one lives in Florida and the other in California, where the state's 9.3% bracket applies. Over a 25-year retirement, that gap totals roughly $186,000 before considering lost investment growth. The disparity arises because REIT and BDC distributions, such as those from Realty Income and Ares Capital, are largely taxed as ordinary income at both federal and state levels, while U.S. Treasury interest is exempt from state taxes by federal law, making instruments like the iShares 0-3 Month Treasury Bond ETF a more tax-efficient choice in high-tax states. Additionally, higher income can trigger Medicare IRMAA surcharges, further reducing net spending power. The analysis underscores that the highest-yielding portfolio is not always the one that delivers the most usable retirement income after accounting for taxes, Medicare premiums, and inflation.
Ares Capital CorporationArticle notes REIT and BDC distributions are taxed as ordinary income at state level, making Ares Capital's dividends less tax-efficient in high-tax states.
Johnson & Johnson
Realty Income Corporation