Did you know that there are states that don't tax retirement income?
You probably were aware that there are states that don't tax income, which includes retirement income, but there are some states that don't tax your pensions too. This includes defined contribution plan distributions like traditional, SEP, and SIMPLE IRAs, 401(k)s, 457, Thrift Saving Plans, and more.
While you shouldn't pick where you live based solely on taxes, if you're looking for a little edge to put one state over another – this list may give you one.
1. Alabama
In Alabama, you don't pay state taxes on income from defined benefit pensions, which makes it slightly favorable for retirees that still have a traditional pension. Distributions from IRAs and 401(k)s are taxable though. Alabama does not tax Social Security benefits though.
2. Alaska
As one of the eight states that doesn't tax income at all, Alaska won't take a piece of your pensions or 401(k) or IRAs. As a resident, you can also benefit from the annual Permanent Fund Dividend. Alaska is appealing if you like the outdoors, wildlife, and wide open spaces. Alaska is quite cold though!
3. Florida
Florida is yet another state that does not tax income, so your pensions, IRAs, and such are tax free. It's a bit warmer than previously listed Alaska, plus there is no estate or inheritance tax… which your heirs may appreciate!
4. Hawaii
Hawaii is beautiful. Hawaii also exempts pension income if it is funded by your employer. If you make contributions, such as with 410(ks) and IRAs, that is taxable. It also does not tax Security benefits. In addition to a wonderful climate, there a lot of island culture and beauty. Cost of living is a bit high, as you are on an island, but many love it.
5. Illinois
Illinois is tax friendly because it doesn't tax retirement income. This includes pensions, 401(k)s, IRAs, and even Social Security benefits. There is a variety of communities, from the very urban Chicago to quieter rural towns, that offer different styles of retirement.
6. Iowa
As of 2023, which is fairly recently, Iowa doesn't collect income taxes from retirement sources for residents over the age of 55. This includes pensions, 401(k)s, IRAs, and Social Security benefits.
7. Mississippi
Like Iowa, Mississippi is yet another state that collects income tax but exempts retirement income. This includes pensions, 401(k)s, IRAs, and Social Security benefits. It's a warm climate with a low cost of living that can be appealing for those on a fixed income.
8. Nevada
Nevada is a state with no income tax, so all your income is tax free including those derived from pensions, IRAs, 401(k)s, and Social Security. As an added bonus, Nevada has no estate or inheritance tax either. Nevada has so many fun places to go whether it's the glitzy Las Vegas or the more serene Lake Tahoe, there's plenty for anyone to do.
9. New Hampshire
New Hampshire doesn't tax any income anymore. It used to exempt wages and retirement income, while taxing interest and dividends. That was repealed after December 31, 2024.
10. Pennsylvania
Pennsylvania is retiree friendly because it exempts all retirement income too. This includes pensions, 401(k)s, IRAs, and even Social Security benefits. A reasonable cost of living and more centralized location, it's a good spot for retirees. If you live to the east near Philadelphia, you're close to many major airports and New York City. If you live to the west, you get to enjoy Pittsburgh and all the Rust Belt states.
11. South Dakota
South Dakota does not levy a state income tax so all your income, regular or retirement, is tax free. South Dakota also has no estate or inheritance taxes too.
12. Tennessee
Tennessee is yet another state that does not collect a state income tax so all your income, retirement or otherwise, is tax free. It also does not have an estate or inheritance tax. Tennessee offers a wide variety of culture and nature whether it's the Smokey Mountains or bustling Nashville.
13. Texas
Texas is famous for not having a state income tax and this applies to retirement income too. Texas is also enormous, which means you can pick whatever climate or lifestyle you wish. Whether it's a massive city, of which there are several to choose from with different personalities, or something quieter, there's something for everyone. And no state income tax!
14. Washington
Residents of Washington state do not have to pay an income tax, so retirement income isn't taxed either. There is one hitch though, there is a 7% capital gains tax on gains of over $270,000. They may add a higher rate for gains over $1 million but that is still in the discussion phase.
15. Wyoming
Finally, we have Wyoming and residents there are not subject to a state income tax and so retirement proceeds make it to your bank account in full. Wyoming offers a slower pace of life with plenty of nature, it's great if you value peace and wide open spaces.
