Would moving to a state with no income tax save you money in retirement, or is it just a myth? With rising living costs and changing tax laws, choosing a tax-friendly state has become critical to thoughtful retirement planning. Understanding which states offer real savings is key if you seek tax filing guidance or want practical tax preparation tips.
According to recent reports on retiree relocations, many retirees are moving across state lines, with a significant portion primarily for retirement tax benefits. That’s proof taxes matter. In this article, we explore which states offer the most important tax breaks for retirees, how different types of income are taxed, and what to consider before relocating to a new state.
Which States Have No Income Tax?
The States with No General State Income Tax on Retirement Income
If you're planning your retirement and want to keep more of your retirement savings, these nine states stand out because they levy no general state income tax. This means they won't tax your retirement income, including pension income or distributions from retirement accounts like 401(k)s and IRAs.
Here are the states do not tax general income, making them highly tax-friendly for retirees:
- Alaska
- Florida
- Nevada
- New Hampshire (Effective 2025, New Hampshire no longer taxes interest and dividends, making it a true no-income-tax state for all general income types)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
In these states, you won’t pay taxes on wages, pension income, or distributions from retirement accounts like 401(k)s or IRAs. That’s a significant tax benefit when considering how much of your retirement savings could otherwise go to state taxes. Living in a state without a state income tax simplifies your tax filing and can lower your overall tax bill, especially compared to other states with high income tax rates or extra taxes on retirement income. For many retirees, especially business owners selling off assets and drawing from multiple forms of retirement income, this kind of tax relief makes these tax-friendly states for retirees highly attractive.
Important Note on Other Taxes: While these states don't have a general state income tax, they still need to generate revenue. This often means higher sales or property taxes to make up the difference. It's crucial to research the average sales and property taxes and other local fees and licenses in any specific area you consider. For example, while New Hampshire has no sales tax, it often has higher property tax rates. Washington state has a relatively high sales tax. Therefore, a state with no income tax isn't automatically the cheapest state to live in, and your overall cost of living should be considered in your retirement planning.
Which States Don’t Tax Retirement Income (Even If They Have Other Income Taxes)?
The Four States Exempting All Qualified Retirement Income
These four states should be on your radar if you’re looking for states that don’t tax retirement income, even with a general state income tax rate. These states exempt all qualified retirement income from state taxes, meaning your pension, 401(k), IRA distributions, and Social Security benefits are untouched by their state income tax:
- Illinois
- Iowa (As of 2023, for anyone aged 55 and over, Iowa fully exempts retirement income from state tax.)
- Mississippi
- Pennsylvania
In these states, even if you have other forms of taxable income (like active wages), your retirement income itself will not be subject to state tax. For example, Illinois has a flat income tax rate of 4.95%, and Pennsylvania has a flat income tax rate of 3.07%, but your qualified retirement income in these states is exempt from these taxes. This makes them exceptionally tax-friendly states for retirees, especially if you're still active in business or have other forms of taxable income that aren't retirement income. This also often includes military retirement pay, which many states do not tax.
What Income Qualifies as “Retirement Income” for Tax Exemptions?
Understanding what specific income types qualify for these state tax exemptions is critical for accurate tax planning. Generally, retirement income that qualifies for favorable tax treatment must be:
- Withdrawn after age 59½ from qualified retirement plans (e.g., 401(k)s, 403(b)s, 457s, traditional IRAs).
- Social Security retirement benefits.
- Pension income, including government and military retirement pay.
If you take early withdrawals from a retirement account before age 59½ (unless a specific IRS exception applies), it’s typically not considered "qualified" retirement income for these state exemptions. In such cases, you could face federal tax and penalties and state tax on those distributions, even in states that generally don't tax your retirement income. So, if you’re looking for tax relief, adhere to the age and distribution rules to keep your income tax-free.
Do States Tax Social Security Benefits?
Which States Still Tax Social Security Benefits?
While most states do not tax Social Security benefits, some still do. Retirees need to understand these nuances as taxes on Social Security can significantly impact their overall retirement income.
As of the 2025 tax year, here are the states that tax Social Security benefits:
- Colorado (offers generous deductions based on age and income)
- Connecticut (has income thresholds for exemption)
- Minnesota (has income thresholds for exemption)
- Montana (has income thresholds for exemption)
- New Mexico (offers deductions based on income)
- Rhode Island (has income thresholds for exemption)
- Utah (offers a tax credit for Social Security benefits)
- Vermont (has income thresholds for exemption)
- West Virginia (is phasing out its tax on Social Security benefits by 2026, so this will change soon)
These states may treat Social Security benefits as taxable income under their state tax systems, often mirroring federal tax rules or applying their income thresholds. Sometimes, your adjusted gross income (AGI) determines how much of your Social Security income you’ll pay taxes on. Living in these states can raise your overall tax burden if you draw heavy income from retirement accounts, plus Social Security. Some offer a tax deduction or credit, but it’s often capped or phased out based on income. So if your retirement income tax strategy includes Social Security, be cautious in these nine states.
Recent Shifts: States Eliminating Social Security Taxes
The trend among states is generally towards becoming more tax-friendly for retirees. Several states have recently made significant changes regarding taxes on Social Security benefits.
For example, in recent tax years (including 2024), Kansas, Missouri, and Nebraska joined the list of states that don’t tax Social Security. That’s a big win for retirees living in the Midwest. These shifts show that many retirees are influencing policy. Many states recognize how essential tax benefits are to retirees, helping shape more favorable policies across the U.S. As mentioned, West Virginia is also on track to fully repeal its tax on Social Security income by 2026, offering future relief for retirees in that state.
Beyond Income Tax: Other State Taxes to Consider in Retirement Planning
While state income tax on retirement income is significant, it’s only one piece of the overall tax puzzle. A truly tax-friendly state evaluates all aspects of a retiree's tax burden.
- Sales Tax: Almost every state levies a sales tax on goods and services. Some states with no income tax (like Washington and Florida) have higher sales tax rates to compensate. Consider how much you spend on consumer goods, as a high sales tax can negate income tax savings. Remember to factor in local sales taxes, which vary significantly by county or city.
- Property Tax: This is often the most considerable tax burden for homeowners in retirement. Property tax rates vary wildly by state and even by locality within a state. Some states with no income tax (like New Hampshire and Texas) have notably high property taxes. Conversely, some states with income tax may have very low property tax rates. Always research average property taxes in specific areas you're considering.
- Estate or Inheritance Tax: A few states still levy an inheritance tax (on heirs receiving assets) or an estate tax (on the total value of a deceased person's estate). This can be a significant consideration for retirement planning and legacy. Most states do not tax inheritances or estates, but checking the state you reside in is crucial for long-term planning.
- Cost of Living: Beyond direct taxes, the overall cost of living (housing, utilities, groceries, healthcare) is a huge factor. A state with low taxes might have a very high cost of living, making it less affordable than a state with a moderate tax rate but a lower cost of living.
Key Takeaways for Your Retirement Tax Planning
- Nine states levy no general state income tax at all, meaning they won't tax your retirement income or pension: Alaska, Florida, Nevada, New Hampshire (effective 2025), South Dakota, Tennessee, Texas, Washington, and Wyoming.
- Four additional states (Illinois, Iowa, Mississippi, and Pennsylvania) fully exempt qualified retirement income from state income tax, even if they have a general tax rate.
- Most states do not tax Social Security benefits. However, nine states still do (Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia, though West Virginia is phasing it out by 2026).
- Always consider the full tax picture: In some states, high property and sales taxes can significantly offset income tax savings.
- Effective retirement planning means looking beyond just income tax to evaluate the total cost of living and comprehensive state and local tax burden to find the most tax-friendly state for retirees.
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