13 States With No Tax on Retirement Income

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Contributor, Benzinga
February 21, 2024
retirement

Short Answer: Florida is considered as the most tax-friendly state for retirees living on a fixed income.

As the country prepares for the upcoming elections, it's crucial to understand how potential changes in retirement age laws and benefits could impact your future plans. While in retirement, your income is fixed, which can come from various sources such as pension, Social Security, 401(k) and IRA withdrawals. Retirement savings may not be your only source of income, but it can play a big part in allowing you to continue living your desired lifestyle. When it’s gone, it's gone. That’s why every little bit of savings matters.

While some states tax all types of retirement income, others offer special exemptions or credits to retirees. Knowing which states offer tax breaks on retirement income can help you make an informed decision about the best state to retire in financially. Over the years, this can save retirees thousands of dollars and help them make their retirement savings last longer. This guide is a list of all the U.S. states that don’t have a retirement tax and discusses whether or not moving there is a good idea.

Which State Do Not Tax Retirement Income?

Moving to a state without a retirement tax can help retirees save money so their retirement income lasts longer. It’s important to note, however, retirees have to pay federal income tax on their retirement income no matter where they live. Like regular income, retirees will be taxed in a tax bracket determined by their overall income.

Federal income tax may be unavoidable, but moving to a state with no state retirement income tax can significantly decrease that tax burden. Some states have no income tax at all, while others exempt retirees from paying retirement tax.

States With No Tax on Retirement Income

Choosing a state with no tax on retirement income can have a significant impact on your overall financial well-being during retirement. Here's the list of states that do not tax retirement income:

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

In addition to those eight states, New Hampshire does not tax earned wages, Social Security or retirement plan distributions, but the state taxes interest and dividend income.

Furthermore, there are four more states that are tax-friendly toward retirees. These states provide exemptions, low-income tax rates or minimums that must be met before tax is levied.

  • Illinois: Illinois residents may subtract certain types of retirement income (e.g. pension, Social Security, railroad retirement) from their income tax return if they meet the requirements.
  • Iowa: Iowa taxpayers must meet plan requirements to qualify for the retirement income exclusion.
  • Mississippi: Generally, the state of Mississippi does not tax retirement income, pensions and annuities if the recipient has met the retirement plan requirements. Distributions made before retirement are not considered retirement income and may be taxable.
  • Pennsylvania: Retirement benefits that meet the requirements under an employer's plan are not taxable in Pennsylvania. These benefits are commonly recognized as non-taxable for state purposes.

States That Don’t Tax Social Security

Social Security benefits are a crucial source of income for many retirees. With tax laws varying from state to state, it's important to know where you can potentially save money and avoid unnecessary tax burdens.

Here are the 39 states that have chosen to exempt Social Security from state income taxes, providing retirees with a significant financial advantage.

  • 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

It’s also important to remember that income tax isn’t everything. Before deciding to move to a state that does not tax retirement income, retirees should research other information about the state, including healthcare costs, property taxes and cost of living. These are other important considerations when ensuring your retirement income will last. 

Additionally, retirees deserve to enjoy their retirement. When considering a move to save money, retirees should also move to a place that is accessible and has things to do such as museums, entertainment venues, parks and more.

How to Make the Most of Retirement Income

Considering tax on retirement income is one of the first steps to ensuring your retirement income lasts, but there are also many steps you can take before and after retirement to help make the most of your income in retirement.

  • Move somewhere cost-efficient: Retirees should consider moving somewhere with a low cost of living, check property taxes, and ensure accessibility to lower expenses and make their income last.
  • Delay starting Social Security: Did you know you can actually get more money in Social Security if you wait to take benefits until you’re 70? The benefit increases with every month it is delayed, up until age 70. This can help reduce the burden on retirement savings.
  • Budget for your retirement expenses: To optimize retirement income, it is important to plan ahead by budgeting for all retirement expenses and working with a financial planner to ensure you have enough income to cover those costs.
  • Diversify your assets: Diversifying your portfolio by investing in different assets and industries can help reduce risk and potentially increase returns. Consider using a retirement planning platform or consulting with a financial planner to find the best balance for your portfolio.

Save Money and Retire Happy

The goal of retirement savings and income is to fund a successful and happy retirement. These can be the best years of a retiree's life, spending time with family, traveling and pursuing hobbies and activities they didn't have time for previously. But in order to do that, they need to have financial security. Moving to a state with little to no retirement income is just one step in achieving financial comfort.

Frequently Asked Questions

Q

How do I avoid paying tax on my pension?

A

Federal income retirement tax is unavoidable, but retirees can avoid paying state taxes on retirement by moving to a state that does not have an income tax or doesn’t tax retirees.

Q

What is the best state to live on Social Security?

A

The best state to live on Social Security is one that does not tax Social Security benefits, such as Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming, Illinois, Pennsylvania or Wyoming.

Q

What is the most tax-friendly state to move to?

A

When looking for the most tax-friendly state for retirees, you may consider popular options such as Florida, New Hampshire or South Dakota.

About Savannah Munholland

Savannah Munholland is a dynamic author and communications professional known for her captivating storytelling and expertise in public relations. With a passion for YA fiction, Savannah explores themes of sexuality and acceptance in her writing, resonating with diverse audiences worldwide. Alongside her literary pursuits, she excels in verbal and written communications, social media management, and customer service, showcasing her multifaceted talents. As a dedicated advocate for the LGBTQ+ community, Savannah’s work reflects her commitment to promoting inclusivity and representation. Whether crafting compelling narratives or spearheading PR campaigns, Savannah’s creativity and determination leave an indelible mark on every project she undertakes.