States vary greatly in how they tax retirement income, so location is an important consideration in financial planning for retirement. Some states do not tax income states on any type of retirement income, while others tax IRA and 401(k) distributions, pension payments, and even retirement benefits. social security payments as ordinary income. However, income taxes are only part of the story, as some states with low or no high income taxes have high property, sales, and other taxes. Consider working with a Financial Advisor when you plan to retire to ensure that you avoid any unnecessary taxes.
Basics of retirement income tax
Most retirement income is subject to federal income tax. That includes Social Security benefits, pension payments and distributions from IRA and 401(k) plans. Exceptions include distributions from Roth IRA and Roth 401(k) plans. Federal income tax on Roth contributions is paid before the contributions are made. These contributions as well as any investment gains can be withdrawn free of federal income tax after five years if you have reached age 59 1/2.
The situation is more complicated when it comes to how states will tax your income. Many states have no income tax, so all retirement income, as well as other income, is exempt from state taxes. Most states specifically exclude Social Security benefits from taxes. Some others also waive retirement and pension account distributions. Most have a variety of approaches to taxing retirement income.
Now that you have a good basic knowledge of how retirement taxes work at the state level, let’s dive into states that don’t tax you at all.
Countries that don’t tax retirement income
Eight states have no state income tax. Those eight — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — tax no wages, salaries, dividends, interest or any other kind of income.
No state income tax means these states also don’t tax Social Security retirement benefits, pension payments, and distributions from retirement accounts. Even stock income held in a non-retirement brokerage account is not subject to any state income taxes in these states. That means retired residents in these states don’t have to worry about paying state income taxes on their income from any source.
Another state, New Hampshire, there is no state income tax on wages, salaries, retirement account withdrawals or pension payments. But New Hampshire currently taxes dividends and interest, which can be a source of income for some retirees with assets beyond retirement accounts.
The rest of the states have different approaches to taxing retirement income. Some tax all retirement income, including Social Security. Others exempt Social Security but tax sources such as pensions and retirement account income if the retiree’s income exceeds certain limits. But the following states do not tax retirement income of any kind.
11 states do not tax retirement income 1. alaska No state income tax 2. Florida No state income tax 3. Illinois Exempt retirement income, including Social Security, pensions, IRAs, 401(k) 4. Mississippi Exempt retirement income, including Social Security, pensions, IRAs, 401(k) 5. Nevada No state income tax 6. Penn State Exempt retirement income, including Social Security, pensions, IRAs, 401(k) 7. South Dakota No state income tax 8. Tennessee No state income tax 9. Texas No state income tax 10. Washington D.C No state income tax 11. Wyoming No state income tax
States with small retirement tax requirements
Some states that don’t appear on this list of states that don’t tax retirement income are still relatively generous in allowing retirees to escape the tax burden. For example, Georgia does not tax Social Security retirement benefits and also provides a deduction of up to $65,000 per person on all other types of retirement income.
In addition, in Penn State All Social Security and IRA benefits and 401(k) income are waived. And Keystone State does not tax income on pension payments to people over 60. Obviously, taxing state retirement income is a bit complicated. One of the biggest differences between states is the variety of income limits to qualify for the exemption.
Additionally, taxing state retirement benefits is a moving target. State tax laws change over time. For example, the 5% tax on New Hampshire dividends and interest will be phased out in January 2027. Until then, the tax rate on New Hampshire dividend and interest income will be reduced every year. years until zero.
bottom line
Eleven states have no income tax on retirement income from any source. Others provide resident retirees with varying degrees of tax exemptions for Social Security, retirement account distributions, pension payments, and other types of retirement income. Some of the exemptions are generous enough that many retirees in those states don’t pay any income taxes. Details such as retirement income issues and varies by stateso it’s important to check the details with your state tax office before relocating to save on taxes.
Advice for retirement
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A financial advisor can help you balance taxes and other considerations related to choosing where to retire. Finding a qualified financial advisor is not difficult. SmartAsset’s free tool connects you with up to three financial advisors serving in your area, and you can interview the right advisors for you for free to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goals, start right now.
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There are more ways to plan for a safe and comfortable retirement than avoiding all state taxes on retirement income. States may not tax retirement income, but they do. Read more about retirement tax.
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