When it comes to retirement, many people think about how much money they’ll have after they stop working.
Social Security is often the first thing that comes to mind, but there are other sources of retirement income that need to be considered, like 401(k) plans, Individual Retirement Accounts (IRAs), and pensions.
The tax treatment of these income sources varies depending on where you live in the United States.
Some states tax retirement income heavily, while others don’t tax it at all. Understanding how these taxes work can help you keep more of your hard-earned money during retirement.
States That Don’t Tax Retirement Income
Some states in the U.S. do not tax retirement income, including money from Social Security, 401(k)s, IRAs, and pensions.
These states offer a big tax break for retirees, making them attractive places to live if you’re planning to retire. Here are the states where you don’t have to pay income tax on your retirement income:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
It’s important to note that even in these states, other taxes may apply, such as property taxes or sales taxes. For example, New Hampshire doesn’t tax income but does tax interest and dividends. However, starting in 2024, it will no longer collect taxes on these types of income.
States That Tax Income But Not Retirement Income
Some states tax regular income but do not tax retirement income. If you live in one of these states, you won’t have to pay taxes on your Social Security benefits, pensions, or 401(k)/IRA distributions. These states are:
- Illinois
- Iowa
- Mississippi
- Pennsylvania
However, it’s important to be aware of some exceptions. For instance, if you take an early withdrawal from your 401(k) or IRA, it might be taxed in Mississippi and Pennsylvania.
Additionally, Alabama taxes pension income, but not 401(k) or IRA distributions, while Hawaii doesn’t tax pension income if the retiree didn’t contribute to the pension fund.
States Where Social Security Isn’t Taxed
For most retirees, Social Security benefits are not taxed by the state. However, some states still tax other retirement income. The states that don’t tax Social Security benefits include:
- Alabama
- Arizona
- Arkansas
- California
- Delaware
- Georgia
- Hawaii
- Idaho
- Indiana
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Missouri
- Nebraska
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- South Carolina
- Virginia
- Wisconsin
While Social Security benefits might be tax-free in these states, other types of retirement income might still be taxed, so it’s important to check the state’s tax rules before making any decisions about where to live after retirement.
Key Considerations When Moving for Tax Benefits
If you’re planning to move to a state with better tax breaks during retirement, consider all the factors before making a decision.
Even if a state doesn’t tax your retirement income, it may still have higher property taxes or sales taxes.
Additionally, some states have specific rules that might impact your income, like the way early withdrawals are taxed or how investment income is treated.
Before deciding where to retire, make sure you research the tax laws of the state you’re considering. Planning ahead can help you make the most of your retirement funds.
Taxes on retirement income can be confusing, but knowing which states tax which types of income can help you make informed decisions about where to retire.
States like Florida and Texas don’t tax retirement income at all, while others, like Illinois and Pennsylvania, only tax non-retirement income.
It’s important to consider all the tax rules, including sales taxes, property taxes, and the tax treatment of Social Security and pensions. This way, you can find the best state to keep your retirement savings intact.
1. Which states do not tax retirement income?
States like Florida, Texas, and Alaska do not tax retirement income, including Social Security, pensions, and 401(k) distributions.
2. Does Social Security get taxed in all states?
No, many states do not tax Social Security benefits, but some may tax other forms of retirement income.
3. Are early withdrawals from retirement accounts taxed?
Yes, some states may tax early withdrawals from 401(k)s or IRAs, even if they do not tax regular retirement income.
4. Does New Hampshire tax retirement income?
New Hampshire does not tax retirement income, but it does tax interest and dividends, though this will end in 2024.
5. Can I move to a state with lower taxes after I retire?
Yes, many retirees move to states with no income tax or low taxes to reduce their tax burden during retirement.
