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12 States That Won’t Tax Your Retirement Distributions

Every penny from your 401(k), IRA, pension and Social Security counts when you’re retired

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Every cent counts for retirees, and for that reason, state taxes are about as welcome as a bear in a beehive. Although you shouldn’t base where you retire on taxes alone, they are an important consideration, especially if you’re going to live in a new state when you retire.

States get tax revenue from a number of sources. Some states, such as Alaska, South Dakota and Wyoming, sit on enough natural resources that their mineral rights sales enable them to keep most taxes extraordinarily low and skip income taxes altogether. Oil-rich Alaska, for example, has no taxes on income, estates or retirement benefits. In fact, residents get an annual payment from the state for their share of those oil riches. In 2022 that was $3,284 per citizen.

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No income tax

The federal government considers distributions from pensions, 401(k)s and traditional Individual Retirement Accounts (IRAs) as income — the same as it does the income you get from work. Eight states have no income tax whatsoever, which means that retirement benefits — including Social Security retirement benefits — remain untouched by the state taxman. Let’s start with the eight states that have no income tax whatsoever: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.

A ninth state, New Hampshire, also has no income tax, so it doesn’t tax retirement distributions. It does, however, tax interest and dividends, which many retirees depend on for retirement income.

Three other states have income taxes but give retirees a break on pensions and retirement plan distributions.

  • Illinois, which has a 4.95 percent flat income tax, won’t tax distributions from most pensions and 401(k) plans, as well as IRAs.
  • Mississippi has a maximum state tax of 5 percent. It doesn’t tax retirement distributions.
  • Pennsylvania has a 3.07 percent flat tax and doesn’t tax retirement plans.

State Taxes and Retirement Distributions

map of the states that do not tax retirement income distributions

What about everyone else? Most states carve out some exemptions for retirement income. For example, in addition to the nine states with no income tax, 21 states don’t tax military retirement pay: Alabama, Arkansas, Connecticut, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New York, North Dakota, Ohio, Pennsylvania, West Virginia, and Wisconsin.

Some states offer breaks on pensions but not 401(k)s or IRAs. Alabama has a maximum 5 percent income tax, and income from pensions is generally exempt. Income from defined contribution plans, such as IRAs, is not totally exempt, but there is a $6,000 annual exemption starting in tax year 2023.

Hawaii has a steep 11 percent top income tax but doesn’t tax pension distributions — at least the part that you didn’t contribute to. You’ll get taxed on your contributions, and any gains from those contributions, when you take withdrawals.

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Other states limit how much retirement income is taxable. Arkansas, for example, exempts $6,000 of private or public employee retirement income, as well as all military and railroad retirement income. New York excludes $20,000 of annuity or retirement benefits for those 59½ or older, as well as government pension income from the U.S., New York State or New York localities. California only exempts railroad retirement income.

Yet other states limit taxes on retirement income by the taxpayer’s age. South Carolina, for instance, will let taxpayers 65 and older subtract $10,000 from their public and private retirement income. Colorado ups that to $24,000.

And some states toss the taxpayer’s income into the equation. In Connecticut, for example, 42 percent of retirement income is shielded from state income tax if you’re single and have an adjusted gross income or $75,000 or less.

Most states don’t tax Social Security benefits. Twelve states do tax some or all of their residents’ Social Security benefits, however: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia.

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