States vary widely in how they tax retirement income, so where you live is an essential consideration in tax planning for retirement. Some states don't levy income tax on any retirement income, while others tax IRA and 401(k) distributions, pension payouts, and even social security payments like ordinary income. However, income taxes are just part of the story, as some states with low or no income taxes have high property, sales, and other taxes.
More of our clients are asking us about this issue. Many more are moving in retirement and picking more tax-friendly states.
Retirement Income Tax Basics
Most retirement income can be subject to federal income taxes. That includes social security benefits, pension payments, and distributions from IRA and 401(k) plans. Exceptions include distributions from Roth IRA and Roth 401(k) plans. Federal income taxes on Roth contributions are levied before the contributions are made. These contributions and any investment gains can be withdrawn free of federal income taxes after five years if you have reached age 59 1/2.
The situation is more complex regarding how states will tax your income. Many states have no income tax at all, so all retirement income, as well as other income, is state tax-free. Most states specifically exclude Social Security benefits from taxation. Some others also exempt retirement account distributions and pensions. Most have a mix of approaches to taxing retirement income.
States That Don't Tax Retirement Income
Eight states have no state income tax on any income. Those eight are – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Retired residents in these states have no worries about paying state income taxes on their income from any source.
New Hampshire has no state income tax on wages, salaries, retirement account withdrawals, or pension payments. But New Hampshire currently taxes dividends and interest, which are likely to be some retirees' income sources.
The rest of the states take various approaches to tax retirement income. Some tax all retirement income, including Social Security. Others exempt Social Security but tax sources such as pensions and retirement account income if retirees' income exceeds a certain amount. But the following states levy no tax on retirement income at all.
Alaska - No state income tax
Florida - No state income tax
Illinois - Retirement income exempt, including Social Security, pension, IRA, 401(k)
Mississippi - Retirement income exempt, including Social Security, pension, IRA, 401(k)
Nevada - No state income tax
Pennsylvania - Retirement income exempt, including Social Security, pension, IRA, 401(k)
South Dakota - No state income tax
Tennessee - No state income tax
Texas - No state income tax
Washington - No state income tax
Wyoming - No state income tax
States With Small Retirement Tax Requirements
Some states that don't appear on this list of those that don't tax retirement income are still relatively generous regarding letting retirees off the tax hook. For instance, Georgia does not tax Social Security retirement benefits and provides a deduction of up to $65,000 per person on all other types of retirement income.
Also, all Social Security benefits and IRA and 401(k) income are exempt in Pennsylvania, and Pennsylvania does not levy income tax on pension payments for those over 60. State taxation of retirement income is somewhat complicated. One of the most significant differences between states is the variety of income caps to qualify for exemptions.
In addition, state taxation of retirement benefits is a moving target. State tax laws change over time. For instance, New Hampshire's 5% tax on dividends and interest is being phased out through January 2027. Until then, the tax rate on dividend and interest income in New Hampshire declines yearly until it reaches zero.
Bottom Line
Eleven states levy no income taxes on retirement income from any source. Others offer resident retirees varying degrees of exemptions from taxation on social security, retirement account distributions, pension payments, and other types of retirement income. Some exemptions are generous enough that many retirees in those states won't pay any income tax. Talking with us for details is essential before relocating to save on taxes.
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