Which 13 States Don't Tax Retirement Income?

Does the ever-rising cost of living have you increasingly worried you'll outlive your retirement savings? If so, you're not alone. It's tough out there, with no evidence of relief on the horizon.

Help is on the way, at least for some people. That's because a handful of U.S. states don't tax most retirement income, allowing you to keep more of your hard-earned dollars when that time comes.

Here's what you need to know.

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States that don't tax retirement income

Just so there's no confusion, you're always subject to federal taxation -- which accounts for the bulk of your total tax burden -- no matter where you live within the United States. So, living in one state or another won't change everything for you. Federal tax deductions like SALT (state and local taxes) or healthcare costs typically don't differ a great deal from one state to the next, after all.

But to the extent that state-based income taxation is chipping away at your total retirement savings (or will do so in the future), some relief may await. See, nine states don't tax retirement income stemming from IRA and 401(k) distributions because they don't impose any state-based income tax at all! The state's operations are funded in other ways, like industry-specific taxes or tourism. These nine states are:

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

But that's only nine states. What about the other four? The remaining 4 of the 13 states in question are a bit unique, in that these states do impose income tax on their residents, yet exempt most retirement income from this taxation. These four states are:

• Illinois
• Iowa (Residents aged 55 or older won't pay tax on retirement income, although as is the case everywhere else, they'll still owe ordinary income tax on work-based wages.)
• Mississippi
• Pennsylvania (Retirement income from eligible plans is only exempt from income taxation if certain requirements are met, but most plans and participants will be eligible for state-tax-free distributions.)

So where does Social Security fit into the picture? This has never been a major concern for current and future beneficiaries, since most states have never and still don't tax Social Security income. In fact, only nine states do tax Social Security benefits, and in many of these cases at least some -- if not all -- of this income ends up being exempt from taxation anyway. These nine states are:

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

That being said, note that 2025 will be the last year that West Virginia taxes any Social Security benefits. Beginning in tax-year 2026, all Social Security income received by the state's residents will be untaxed.

As for military pensions, state-worker pensions, any remaining corporate pension plans and the like, most of each individual state's overall taxation rules described above still apply. There are some quirky exceptions, though. If this potentially impacts your retirement, your best bet is to explore the specifics for your particular state, or the state where you're considering living in retirement.

Just think it all the way through

The idea of sidestepping even just some income taxation in retirement sound great, especially if you live in a state with above-average tax rates or states that also tax Social Security income. It wouldn't be ridiculous to consider moving from one state to another once you're done with your career.

Just be sure to consider all the important details of such a plan. Housing costs could be considerably higher elsewhere, for example, particularly now that many local governments are raising real estate taxes to fund their operations. You may also need to purchase, insure, and maintain an automobile if you're moving away from somewhere with public transportation to a place that doesn't provide any other way to get around.

All the same, in the right scenario, an average individual or household may be able to save a few thousand dollars per year in taxes just by retiring in a particular state. That's nothing to dismiss, particularly if such a move will also improve your quality of life.

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