If given the choice, would you rather not pay taxes? Of course, that’s not a real choice. No matter where you live or what level of income you earn, you’re going to be taxed… even if it’s just sales or property taxes.
However, a handful of states ease the tax burden on retirees simply because those states do not tax retirement income. This could mean thousands of dollars in annual savings – perhaps more – if you live in one of these states or are willing to move there. And depending on how your retirement income is generated, several other states may also be tax-friendly for your personal situation.
Here’s a look at the details that might ultimately inspire you to move.
Nine states with no income tax
There are actually two subgroups among the thirteen states that do not tax retirement income. The first of these groups are the nine states that do not tax retirement income simply because they do not tax income everyone, retired or not. Instead, these states can generate revenue from sectors such as tourism or natural resource extraction. These states are:
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Alaska
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Florida
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Nevada
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New Hampshire*
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South Dakota
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Tennessee
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Texas
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Washington
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Wyoming
*Although New Hampshire does not tax employee wages, note that it will tax interest and dividend payments above $2,400 per year as income through 2024. However, from 2025 this tax will no longer be levied.
To be clear, in all of these nine states, retirement income is defined as distributions from 401(k) accounts and IRAs, as well as retirement income. Of course, if you choose to continue earning work-related income during your retirement in these states, that income will also not be taxed by the state (although it is still subject to federal taxes).
Four states that don’t tax retirement income
In addition to the nine states that simply don’t charge income taxes to anyone, four more states do not tax retirement income from 401(k) accounts, IRAs and pensions, even though they are Doing still tax ordinary working wages. These states are:
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Illinois
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Iowa
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Mississippi
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Pennsylvania
It’s worth noting that in all four of these states, retirees must still meet certain criteria to escape state-level taxation. However, that bar is not particularly high. In all four cases, you just need to be of normal retirement age… although this age may vary slightly from state to state. Check with each state’s tax department for these age-related details.
Other State Tax Considerations for Retirees
Retirement accounts and pensions are, of course, only part of most people’s retirement income. What about social security?
That can be a different story, albeit usually for the better. That’s because most states also don’t tax Social Security income.
The other states, those Doing tax at least part of social security benefits are:
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Colorado
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Connecticut
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Kansas
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Minnesota
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Montana
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New Mexico
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Rhode Island
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Utah
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Vermont
However, keep in mind that several of these states plan to eventually end taxation of Social Security benefits. If you’re not yet retired, don’t rule out the possibility of moving to one of these states in the future if you want to minimize your tax liability.
But what if most of your retirement income comes from a traditional retirement plan, such as a government pension? On that front it is mainly bad news. Most states will still tax at least some of this retirement income as income simply because it’s… well, income.
However, there are still seventeen states that do not tax benefits from pension plans. These states are:
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Alabama
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Alaska
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Florida
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Hawaii
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Illinois
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Iowa
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Mississippi
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Nevada
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New Hampshire
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Pennsylvania
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Rhode Island
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South Dakota
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Tennessee
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Texas
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Vermont
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Washington
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Wyoming
Of course, in nine of these seventeen cases, retirement benefits are not taxed because there is no state income tax to pay in the first place.
Oh, and if you’re collecting or planning to collect military retirement benefits, know that even most states that charge ordinary income taxes still don’t tax this specific income. Of the sixteen that tax military retirement benefits, eleven tax only a portion of these benefits. The five remaining states that fully tax your military retirement income are California, Montana, Rhode Island, Utah and Vermont.
Something to think about
Remember that while several states offer some sort of tax credit to retirees, the biggest tax liability for everyone remains federal taxes. You won’t escape this no matter what state you live in, although you will receive a modest tax break on some of the Social Security retirement income you may owe. Also keep in mind that while your overall tax bill may be cheaper in certain states, the cost of living in those states may be higher than where you currently live and pay more taxes. Just make sure you snap all the numbers when you think about the idea.
Still, every little bit helps. If you can save a few thousand dollars a year by living somewhere that can provide you with a high quality of life in retirement, a move is definitely worth considering.
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