12 States That Don’t Tax Your Retirement Income

Taxes can be one of the biggest expenses for retirees. Your tax burden in retirement can vary depending on where you live. There are 12 states that don’t tax your retirement income distributions. While I would never recommend someone move in retirement to save money on taxes, I would be remiss if I didn’t point out that tax planning doesn’t end once you retire.

Keep reading to find the 12 states that won’t take your retirement income. Keep in mind you still may owe federal taxes on your retirement income. You may end up paying taxes to your state in other ways, like sales and property taxes.

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States with No Income Tax

Distributions from your 401(k), IRA, or 403(b) (and even pension if you are lucky enough to still have one) are considered income. Depending on your total household income in retirement, a good portion of your Social Security income will also be taxable. There are eight states with no income taxes. If you live in one of these states, you could benefit from not owing taxes on your retirement account distributions.

The eight states with no income taxes are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

New Hampshire also has no income tax, but it will tax interest and dividends, which can be a significant part of many retirees’ income streams. If all of your interest and dividends are earned within retirement accounts (think IRA or 401(k)), you could still not have to pay New Hampshire’s state income tax on your retirement income.

States That Reduce Taxes on Retirement Income Taxes

Beyond the nine states mentioned above that do not have income taxes, three more states reduce the taxes owed by retirees. Illinois has a flat tax rate of 4.95% and, in most cases, does not tax distributions from pensions, 401(k)s, or IRAs.

Similarly, Mississippi, which has a maximum state tax rate of 5%, doesn’t tax retirement plan distributions.

Lastly, Pennsylvania has a flat 3.07% tax on income, but it doesn’t take a cut of your retirement plan distributions.

State Taxes on Retirement Plan Income

State tax and retirement-income exemptions vary from state to state. They can also vary by type of income or other factors, like if you are earning a military pension (21 states don’t take military retirement income).

State Taxes on Social Security

Some or all of your Social Security benefits may escape federal income tax if your income is low enough. If you file as an “individual” and your combined income is between $25,000 and $34,000, you will have to pay federal income taxes on 50% of your Social Security income. Earn more than $34,000, and 85% of your Social Security will be taxable. For those using “married filing jointly,” the numbers are a bit higher. Fifty percent of Social Security is taxable on incomes between $32,000 and $44,000. If your combined income is above $44,000, 85% of your Social Security will be taxable at the federal level.

Sadly, 12 states will also tax some or all of your Social Security benefits. These include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

Talk with your proactive tax-planning financial planner before retirement or moving ahead of retirement. Some states tax IRA distributions differently than pension distributions. You might change your choice of taking a pension versus rolling it over to an IRA if there are tax benefits one way or the other. If you are a small business owner in a state that doesn’t tax pension income, you may want to ask your Certified Financial Planner about the benefits of a Cash Balance Pension plan. It could help you increase retirement and decrease your lifetime income taxes.