Taxes on retirement income can significantly impact your financial plans during your golden years. While federal taxes on Social Security and retirement accounts apply uniformly across the U.S., state tax policies vary.
The good news? Several states provide tax relief, particularly for retirees, by not taxing Social Security benefits, 401(k) withdrawals, IRA distributions, or pension income. Let’s explore these tax-friendly states and their policies.
States Without Personal Income Taxes
Nine states in the U.S. do not impose personal income tax, which means your retirement income, including Social Security, is free from state taxation:
- Alaska
- Florida
- Nevada
- New Hampshire (does tax dividends and interest but will phase this out by 2025)
- South Dakota
- Tennessee
- Texas
- Washington (capital gains taxes may apply)
- Wyoming
These states are highly attractive for retirees because no income tax translates into significant savings, especially for those relying on multiple income sources in retirement.
States That Don’t Tax Social Security Benefits
In addition to the no-income-tax states, many others offer relief by exempting Social Security benefits from taxation. Here’s a list of states where Social Security benefits are not taxed:
- Wisconsin
- Virginia
- South Carolina
- Oregon
- Oklahoma
- Ohio
- North Dakota
- North Carolina
- New York
- New Jersey
- Nebraska (partial exemption based on income thresholds)
- Missouri (income limits apply)
- Michigan
- Massachusetts
- Maryland
- Maine
- Louisiana
- Kentucky
- Kansas
- Indiana
- Idaho
- Hawaii
- Georgia (partial exemptions available)
- Delaware
- California
- Arkansas
- Arizona
- Alabama
States That Don’t Tax Retirement Income
Four states stand out because they don’t tax any type of retirement income—whether Social Security, 401(k), IRA withdrawals, or pensions:
- Mississippi
- Pennsylvania
- Illinois
- Iowa (recently adopted a no-tax policy for retirement income)
Tax-Friendly Policies in Select States
Alabama
- Exemptions: Social Security benefits and defined benefit pensions.
- Taxable: Income from 401(k) plans and IRAs.
Hawaii
- Exemptions: Retirement income from public and private pensions if retirees did not contribute to the plans.
- Taxable: Employee-contributed pension plans may incur taxes on the contributed portion’s earnings.
New Hampshire
- Current Tax: Dividends and interest (phased out entirely by 2025).
- Exemption: No taxes on Social Security, IRA, or 401(k) income.
Washington
- Tax Note: No income tax but imposes capital gains tax on certain transactions.
Timing and Early Withdrawals
In some states, early withdrawals from retirement accounts are treated differently:
- Mississippi and Pennsylvania: Early withdrawals are not considered retirement income and are taxed.
- Georgia and others: Partial exemptions for retirees over specific age thresholds.
Planning withdrawals carefully and adhering to age requirements can help minimize tax liabilities.
Why State Tax Policies Matter for Retirees
- Cost of Living: Choosing a tax-friendly state can stretch your retirement income further.
- Relocation Decisions: For those considering moving after retirement, understanding tax policies can help optimize finances.
- Long-Term Planning: Avoiding unnecessary taxes allows for better allocation of resources to healthcare, travel, or other needs.
State-by-State Summary: Tax Treatment of Retirement Income
| State | Social Security | 401(k), IRA, Pensions | Notes |
|---|---|---|---|
| Alaska | Exempt | No income tax | No state income tax. |
| Florida | Exempt | No income tax | No state income tax. |
| Nevada | Exempt | No income tax | No state income tax. |
| New Hampshire | Exempt | Exempt (dividends taxed) | Dividends tax ends after 2024. |
| Mississippi | Exempt | Exempt | Early withdrawals may be taxed. |
| Pennsylvania | Exempt | Exempt | Early withdrawals may be taxed. |
| Illinois | Exempt | Exempt | No retirement income tax. |
| Iowa | Exempt | Exempt | New exemption for retirement income. |
| Hawaii | Exempt | Partially exempt | Depends on plan contributions. |
| Alabama | Exempt | Taxable (401(k), IRA) | Defined pensions exempt. |
Choosing the right state for retirement can significantly impact your financial well-being. States like Alaska, Florida, and Nevada stand out for their lack of income taxes, while Pennsylvania, Mississippi, and Illinois exempt most retirement income.
Understanding these policies allows you to make informed decisions about where to retire or how to manage your savings.
Plan wisely, and you can maximize your retirement income while minimizing tax burdens.
