**A federal law from 1996 prevents California from taxing the retirement income of non-residents. The same protection that covers Shohei Ohtani's $680 million in deferred income also safeguards your 401(k) if you move to another state. We explain how it works and how to secure your money.
Shohei Ohtani's contract with the Los Angeles Dodgers, valued at $680 million, is one of the largest in sports history. Much of that money will be paid in deferred installments between 2034 and 2043, and California will not be able to tax a dollar if the player moves to another state.
That same federal rule that protects Ohtani also covers your 401(k), your IRA, or your pension. It is Article 4 of the United States Code, Section 114, a law enacted in 1996 that prevents states from taxing retirement income of individuals who no longer reside there.
For many workers who have lived in states with high tax burdens, this rule is the key to a lighter retirement. But it is not enough to just move: there are specific steps you must follow to ensure protection.
The anchor of this protection is 4 U.S. Code § 114, enacted as Public Law 104-95 on January 10, 1996. The text is clear: "No state may impose an income tax on any retirement income of a person who is not a resident or domiciliary of that state."
Congress specifically approved it to prevent California and other high-tax states from pursuing their former residents into retirement. It is the same mechanism that Ohtani's team relies on when structuring his contract with deferred payments.
If Ohtani is domiciled outside of California when each paycheck arrives, California collects nothing. That same operational logic applies to anyone who has accumulated savings in a 401(k) while working in one state and then retires in another.
According to Yahoo Finance, the law is "unusually strong for a tax rule," and it closes the door on state governments taxing income that has already been generated under their jurisdiction. The distribution follows the retiree, not the employer.
This means that if you spent 30 years contributing to a 401(k) in California, New York, or New Jersey and move to Florida, Tennessee, or Wyoming, your previous state loses jurisdiction the moment you establish your domicile elsewhere. It does not matter that the money was earned in the state, matched, or deferred there.
The protection covers the qualified plans you already know: 401(k), 403(b), 457(b), traditional and Roth IRAs, SEP-IRA, SIMPLE IRA, defined benefit pensions, and ESOPs. It also covers non-qualified deferred compensation, but only if payments are made in substantially equal periodic installments during your lifetime or over a period of at least 10 years.
A lump-sum payment from a non-qualified plan is easy prey for your previous state because the law only protects payments in installments. Regular wages earned before moving, stock options exercised after leaving, RSUs that vest after the move for work done before the move, and severance pay fall outside the protection.
The statute protects retirement income, not deferred W-2 income disguised to look like it. Therefore, if you have a non-qualified plan, the payment design is crucial to maintaining tax exemption.
In Ohtani's case, his contract with the Dodgers defers most of his payment between 2034 and 2043, a period of exactly 10 years. This meets the requirement for installment payments for at least a decade, which protects his income from California if he decides to change his residency.
If you plan to retire in a cheaper state, review the terms of your deferred plan. If your employer offers you the option to receive a lump sum or a series of payments, choosing installments over 10 years or more can save you thousands of dollars in state taxes.
The first step is to change your domicile before your first distribution. Your driver's license, voter registration, physical residence, mailing address, doctors, and vehicle registration must all be moved. A second home in Nevada while keeping your house in California is not enough.
If you have non-qualified deferred compensation, choose installment payments of 10 years or more according to the Section 409A rules before separation. A lump sum payment causes you to lose federal protection, so structuring the plan is key.
Roll over your 401(k) to an IRA after you have moved. The protection travels with the account, and by making the transfer after establishing your new residency, you ensure that your money is under the jurisdiction of your new tax home.
Keep dated records that prove where you slept. High-tax states conduct residency audits, and the burden of proof falls on you. Utility bills, rental contracts, purchase receipts, and daily activity logs are useful evidence.
Compare real purchasing power, not just advertised rates. California's cost of living is at 110.72, the second highest in the country, while Wyoming registers at 92.69 with a per capita income of $86,609. The difference is significant for stretching your money in retirement.
The main issue is domicile, and California in particular combats it vigorously. The Franchise Tax Board can claim that you never really left if your "closest connections" remained in the state: family, business interests, bank accounts, safe deposit boxes, professional licenses, church, and gym memberships are all evaluated.
If you take a distribution before the move is legally complete, that payment is taxable by the previous state forever, and it can drag subsequent payments into an audit. Therefore, the order of steps matters: first prove the move, then take the money.
The statute is federal and airtight, but it only protects non-residents. If an audit determines that maintaining your house, bank account, or club membership in California indicates that you never left, you will lose protection and have to pay back taxes with interest and penalties.
In Ohtani's case, his situation is unique because his payment schedule is already defined. If he moves to another state before 2034, each payment is guaranteed to be exempt from California taxes. But for the average person, changing domicile requires careful planning and impeccable execution.
With the national savings rate at 2.8% in the second quarter of 2026, every basis point of retained retirement income matters. This federal law is the largest that is hidden in plain sight within your retirement plan documents.
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