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Detailed Guide to: States that Don't Tax Retirement Income

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Taxes have a way of finding your income no matter where it tries to hide. But what if there were places where you don’t have to play hide and seek?

Remember those road trips you promised yourself you’d take once you retired? Well, it’s time to pack your bags, but this trip is a little different.

Understanding Retirement Income Tax

With federal taxation, retirement income is subject to a set of considerations that include the nature of the income and your filing status. The IRS does offer certain tax advantages, such as the potential for partially tax-free Social Security benefits, which are contingent on your combined income.

At the state level, the taxation of retirement income introduces additional complexity. Each state operates under its own set of regulations, with some providing substantial exemptions and others levying taxes on retirement income in full. 

In the realm of state taxation, there’s a diverse landscape. Some states, like Florida and Nevada, offer a reprieve from income tax, allowing retirees to enjoy their pensions, 401(k)s, and IRAs without the burden of state taxes. 

Each state’s approach to retirement income taxation is unique, and a thorough evaluation is beneficial when planning for retirement.

But then, there are states that have a bit more hands-on approach. They’ll give Social Security benefits a pass, but they might tap into other retirement funds. And pensions? It’s a toss-up. Some states tax them, others don’t.

But here’s the good news: even in states where your retirement funds might face taxes, there are often perks and breaks for retirees. You might find tax caps, exemptions if your income is below a certain threshold, or other sweet deals.

The catch is, tax laws change quite often, so it’s crucial to stay updated. 

A number of states exempt all retirement income from taxation, whereas others treat IRA and 401(k) withdrawals, pension disbursements, and Social Security payments as taxable income.

However, income tax isn’t the whole picture, since states with reduced or zero income tax often have elevated property, sales, and miscellaneous taxes.

Which States Don’t Tax Income?

In this group of eight states, residents enjoy a special perk: they don’t pay a dime in state income tax. Whether it’s your income from your 401(k), IRA, pension payments or Social Security check.

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

What does this mean for you?

Well, if you’re earning a salary, collecting dividends, or cashing in on investments, these states won’t take a cut from your income.

For retirees, this is particularly sweet news. Those Social Security checks, pension payments, and any withdrawals from retirement accounts like 401(k)s or IRAs? They’re all yours, free from state tax.

If you’ve got investments outside of retirement accounts, those earnings are also state tax-free.

Then there’s New Hampshire, which is almost in the same boat. It doesn’t tax your wages or retirement funds, but it does currently tax dividends and interest.

So, if you’ve got some investments that generate these types of income, you’ll want to keep an eye on this, especially since New Hampshire is planning to eliminate these taxes by 2027.

No income tax on retirement income

Now, there are four states where, even though they usually have an income tax, they cut retirees some slack. Retirement income, which includes the money from 401(k)s, IRAs, and pensions, as well as those Social Security benefits, gets a free pass.

Here’s the lowdown on those states:

  • Illinois: It’s all clear, no taxes on retirement income.
  • Iowa: If you’re 55 or older, you’re in luck, no taxes on that retirement income.
  • Mississippi: Just make sure your retirement plan checks the right boxes, and you won’t have to worry about state taxes on it.
  • Pennsylvania: Similar to Mississippi, as long as your retirement plan meets certain criteria, you can keep those taxes at bay.

Which States Don’t Tax Social Security?

It’s interesting to note that while 11 states currently tax Social Security benefits, the trend is shifting. Many are in the process of phasing out this tax, which is great news for retirees.

Now, let’s talk about the states where your Social Security benefits can stretch further. In these 39 states plus the District of Columbia, Social Security benefits remain untaxed. 

This means more financial freedom and one less thing to worry about during your golden years.

  • Alabama
  • Alaska
  • Arizona
  • Arkansas
  • California
  • Delaware
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Mississippi
  • Nevada
  • New Hampshire
  • New Jersey
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Oregon
  • Pennsylvania
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Virginia
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

States Which Do Not Tax Retirement Income/Pension

These 15 states don’t tax pension income. (Note: Other states may provide a credit or exemption for a portion of pension income.)

  • Alabama (does tax 401(k) and IRA distributions)
  • Alaska
  • Florida
  • Hawaii (does tax 401(k) and IRA distributions)
  • Illinois
  • Iowa
  • Mississippi
  • Nevada
  • New Hampshire
  • Pennsylvania
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming
Alabama
  • Pensions: Alabama does not tax pensions.
  • 401(k)s and IRAs: The government taxes 401(k)s and IRAs as regular income, with state rates ranging from 2% to 5%.
  • Social Security Benefits: These benefits are exempt from state income tax, offering additional savings for retirees.
  • Income Tax Range: The state income tax rates in Alabama range from 2% to 5%, depending on your total income.
Alaska
  • Pensions: With no state income tax, pensions are not taxed in Alaska.
  • 401(k)s and IRAs: Similarly, these accounts are not subject to state taxes.
  • Social Security Benefits: Also not taxed at the state level.
  • Income Tax Range: Alaska has no state income tax, so retirees enjoy tax-free retirement income.
Florida
  • Pensions: Florida’s lack of a state income tax means pensions are not taxed.
  • 401(k)s and IRAs: These accounts also benefit from the absence of a state income tax.
  • Social Security Benefits: Not taxed by the state, allowing retirees to keep more of their benefits.
  • Income Tax Range: There is no state income tax in Florida.
Hawaii
  • Pensions: Hawaii exempts pension income from state taxes.
  • 401(k)s and IRAs: These are taxed at standard income tax rates.
  • Social Security Benefits: Exempt from state income tax, which can be a significant advantage.
  • Income Tax Range: While specific rates are not provided, there is a 5% tax on dividends and interest.

Illinois

  • Pensions: Not taxed, providing a benefit for retirees.
  • 401(k)s and IRAs: Also exempt from state income tax.
  • Social Security Benefits: Illinois does not tax Social Security benefits.
  • Income Tax Range: Retirees who are not working are not subject to the state’s 4.95% flat income tax rate.
Iowa
  • Pensions: Not taxed for individuals 55 and older.
  • 401(k)s and IRAs: Also not taxed for those 55 and older.
  • Social Security Benefits: Exempt from state tax.
  • Income Tax Range: No tax on retirement income for those 55 and older.
Mississippi
  • Pensions: Not taxed, allowing retirees to keep their full pension income.
  • 401(k)s and IRAs: Not taxed.
  • Social Security Benefits: Also not taxed.
  • Income Tax Range: Mississippi does not tax retirement income.
Nevada
  • Pensions: Not taxed because of no state income tax.
  • 401(k)s and IRAs: Not taxed.
  • Social Security Benefits: Not taxed.
  • Income Tax Range: Nevada has no state income tax.
New Hampshire
  • Pensions: Not taxed.
  • 401(k)s and IRAs: Not taxed.
  • Social Security Benefits: Not taxed.
  • Income Tax Range: No state income tax on retirement income; however, there is a 5% tax on dividends and interest which is being phased out by 2027.
Pennsylvania
  • Pensions: Not taxed for residents 60 and older.
  • 401(k)s and IRAs: Not taxed for residents 60 and older.
  • Social Security Benefits: Not taxed.
  • Income Tax Range: Pennsylvania exempts all forms of retirement income from taxation for residents 60 and older.

For South Dakota, Tennessee, Texas, Washington, and Wyoming, the absence of a state income tax means all forms of retirement income, including pensions, 401(k)s, IRAs, and Social Security benefits, are not subject to state taxation. This makes these states particularly attractive for retirees looking to maximize their income. Always remember, tax laws can change, and it’s wise to consult with a tax professional for the most current information.

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