![[Video] Which States Do Not Tax Retirement Income? Thumbnail](https://static.twentyoverten.com/5c4205e5a8b62a3061fa2074/LTjioRx1-yC/which-states.png)
[Video] Which States Do Not Tax Retirement Income?
As you can probably imagine, our 50 united states have a wide discrepancy in the way they tax retirement income. So location can be an important consideration in financial planning for retirement.
In this video, I discuss which states do not tax retirement income. Some states will exempt all forms of retirement income from taxation, while others may tax distributions from IRAs and/or 401(k)s, pension payouts, and even Social Security payments, just like ordinary income.
Retirement Income Tax Basics
Most retirement income is subject to federal income taxes, including Social Security benefits, pension payments, and distributions from IRAs and 401(k)s. But remember, Roth IRA and Roth 401(k) distributions are not taxed, since they were taxed before contribution. Contributions and gains can be withdrawn tax-free, if the accounts are qualified and after reaching age 59 1/2.
Now, of course, there are many nuances surrounding the taxation of retirement income. Even if certain states tax distributions, almost all states offer some form of tax relief for retirees, whether it’s a tax cap, an income limit on exemptions, or some other tax break. And, since state tax laws are always changing, it’s important to stay up-to-date with your state tax commission. Our tax laws are written in pencil, right - always changing.
Specific State Taxation Laws
First, there are 9 states with no income tax at all. They include: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. These states do not levy any income tax, whether it's from a paycheck or retirement sources. But, even though New Hampshire does not have an income tax, they do tax interest and dividends, just to keep it simple. (Just kidding - seems arbitrary, doesn’t it?)
Next, there are 4 states with no income tax on “Retirement Income.” These 4 states are Illinois, Iowa (for individuals 55 or older), Mississippi, and Pennsylvania (and those last two are subject to retirement plan requirements). So these 4 states make specific exceptions for retirement income, from 401(k)s, IRAs, pension distributions, and Social Security benefits.
So the 9 states with no income tax combined with the 4 states that exclude retirement income from income taxes, gives us 13 states that do not tax retirement income.
Social Security & Pension Income
Now, what about Social Security? Well in most states, Social Security payments are exempt from taxes.
But 10 states still tax Social Security income, and they are: Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. As of 2024, Missouri and Nebraska no longer tax Social Security benefits. Each state has its own policies, offering breaks or exemptions based on income and/or age, so even in states that tax distributions, there are often tax relief options for retirees.
Next, we have 15 states with no tax on pensions. These states include the 13 states already mentioned, that don’t tax retirement income at all, and include Alabama and Hawaii, which don’t tax pensions, but still tax 401(k) and IRA distributions. And of course, other states may provide credits or exemptions for a portion of pension income.
Other Retirement Income Tax Laws
And there are a few states with minimal retirement tax obligations. Take Georgia, for example, which waives taxes on Social Security retirement benefits and allows a deduction of up to $65,000 per person, for various other retirement income sources.
Clearly, the landscape of state taxation on retirement income is complicated. The variety of income caps to qualify for exemptions can vary greatly between states.
Furthermore, the taxation of retirement benefits at the state level remains a changing landscape. State tax laws change just like federal tax laws. For instance, New Hampshire plans to phase out its 5% tax on dividends and interest by January 2027. Until then, the tax rate on dividend and interest income will gradually decrease each year until it reaches zero.
Bottom line:
When you’re planning for retirement, minimizing unnecessary taxes is essential. But it's crucial not to let it dictate your overall strategy. Or as I like to say, we don’t want the tax tail to wag the dog. Income taxes are just one aspect to consider. Some states with low or no income taxes may have high property, sales, and other taxes.
For instance, as those of us living in Illinois can attest, even though Illinois does not tax retirement income, we have relatively high real estate taxes. So, as with any good plan, you need to think about what you want and where you want to be first, and then create a roadmap to get there.
A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation.