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.
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.
Four 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.
- Iowa, which has a maximum 4.4 percent income tax, but no longer taxes retirement plans.
State Taxes and Retirement 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.