It's True: These 13 States Don't Tax Retirement Income

Are you interested in maximizing your retirement income by minimizing the amount of income tax you pay on this income each year? If so, you've got options. The state you live in can make a big difference when it tax time arrives. Some states don't impose income tax on the most common forms of retirement income.

Here's what you need to know.

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Income tax-friendliest states for retirees

Just to be clear, while not all states take a piece of your income in retirement for themselves, this only applies to state-based income taxes. You're still subject to federal (IRS) income taxation during retirement, which of course is the greater tax burden of the two. Some -- though certainly not all -- cities and counties will also tax this income.

Still, if sidestepping state taxes can save you hundreds or thousands of dollars a year, a move may be worth considering.

To this end, here's a rundown of nine states that don't tax retirement income simply because these states don't have any income tax at all! These state governments are funded through other means, like sales tax or business income tax.

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

But there were supposed to be 13 of these states? There are. Although the following four states do collect income tax on ordinary work-based wages, they don't count withdrawals from IRAs, 401(k) accounts, or Social Security benefits as taxable income.

• Illinois
• Iowa
• Mississippi
• Pennsylvania

Just be aware that in Pennsylvania and Mississippi, most early withdrawals from ordinary retirement accounts are taxed as income. So, if minimizing your tax bill is a concern, plan carefully if you live there or are thinking about moving to either state.

Image source: Getty Images.

Retirement account distributions aren't most people's sole source of income in retirement, though. For Social Security benefits, there's good news too! Most states don't tax this income, even if the federal government still partially does. Indeed, as it stands right now, there are only nine states that do tax at least some Social Security retirement payments.

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia

West Virginia has been incrementally phasing out its taxation of Social Security, and beginning in tax year 2026, the state will no longer tax benefits at all.

Also know that while your Social Security benefits are subject to income taxation in these soon-to-be-eight states, many of these locales offer at least a bit of preferential treatment for benefits. In Connecticut, for instance, single filers with adjusted (total) gross retirement income of less than $75,000 and joint filers with adjusted gross income (AGI) of under $100,000 won't actually owe any income tax on Social Security payments. You'll want to explore each state's specific rules on how these benefits are taxed if you've got a particular move in mind.

The same advice also applies to anyone with a military retirement, a pension plan, or state pension plan. You'll want to check each state's specific rules if you're going to be collecting such income. State taxation of these plans' payments varies and isn't necessarily consistent with that state's other retirement income tax rules.

Flesh out the bigger picture

Avoiding income taxes can save you money, but it shouldn't be your one and only concern in retirement, of course. It's possible for the cost of living to be too high in parts of the no-tax states you'd consider moving to. One of the chief complaints from Floridians right now, for instance, is soaring real estate taxes, negating the benefit of living in a state that doesn't charge a state income tax. It's also possible such a move could take you away from family that you'd want to have close by in your golden years.

If you're considering such a move, doing a side-by-side comparison of what it's costing you to remain where you are and what it will cost you to live somewhere else can be helpful. Such an exercise will require research into local tax rates and some assumptions around your budget and expenses in the new location, but the math doesn't have to be perfect. Just get a basic idea of what you might save (or not) by moving -- you may end up being surprised by what you find.

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