States That Don’t Tax Retirement Income

If you’re considering relocating to a different state when you retire, you might want to think about how your income will be taxed in the state you plan to move to. planning to move to. State income taxes can range as high as 13.3% unless you live in a state that doesn’t tax retirement income.

There are nine states that impose no income tax at all. If you are a retiree, you can move to any one of those states without concern for the state income tax liability on your retirement income. However, there are many other states that exempt income from specific retirement sources, like Social Security, pensions, military pensions, and distributions from defined contribution retirement plans.

There are nine states that currently have no income tax. Since they don’t, no income taxes are imposed on retirement income. (Source: H&R Block)

The nine states with no income tax include:

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

*New Hampshire currently has a 5% income tax levied on interest and dividend income. The tax applies to interest and dividends in excess of $2,400 for single taxpayers and $4,800 for married couples filing jointly.

However, it is scheduled to be phased out by 2027.

13 States That Don’t Tax Defined Contribution Plan Distributions

As is the case with federal income tax, most states tax distributions from defined contribution plans. These include traditional, SEP, and SIMPLE IRAs; 401(k), 403(b), 457, and Thrift Savings Plans (TSPs). However, 13 states don’t impose tax on defined contribution plan distributions. (Source: Bankrate)

Included are the nine “no income tax” states with no income tax, along with these four additional states that don’t tax defined contribution plan distributions:

• Illinois
• Iowa
• Mississippi
• Pennsylvania

What about Roth IRA distributions?

Generally speaking, states follow the same tax treatment with Roth IRA distributions as the IRS. But since each state has its own tax code, you’ll need to check with your tax preparer or tax software program to determine if (and when) Roth IRA distributions can be taken tax-free.

* Note that in researching for this article, we could not identify a single authoritative source confirming conclusively that Roth IRA distributions can be taken tax-free in all 50 states and the District of Columbia.

15 States That Don’t Tax Pension Income

A total of 15 states don’t tax pension income. In addition to the nine states with no income tax, six additional states impose no income tax on pension income (also known as defined benefit retirement plans). (Source: Kiplinger)

• Alabama
• Hawaii
• Illinois
• Iowa
• Mississippi
• Pennsylvania

32 States That Don’t Tax Military Pensions

A total of 32 states don’t tax military pensions. In addition to the nine states with no income tax, the following 23 states don’t tax military pensions. (Source: MyArmyBenefits, The official military benefits website of the U.S. Army, Table of 2021 State Taxes and Military Retired Pay):

• Alabama
• Arkansas
• Arizona
• Connecticut
• Hawaii
• Illinois
• Iowa
• Kansas
• Louisiana
• Maine
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• New Jersey
• New York
• North Carolina
• North Dakota
• Ohio
• Pennsylvania
• Utah
• West Virginia
• Wisconsin

The following 16 states provide partial exemption from state income tax on military pensions:

• Colorado
• Delaware
• Georgia
• Idaho
• Indiana
• Kentucky
• Maryland
• Missouri
• Montana
• Nebraska
• New Mexico
• Oklahoma
• Oregon
• Rhode Island
• South Carolina 
• Virginia

Only three jurisdictions provide no exemption for military pensions:

• California
• The District of Columbia
• Vermont

A total of 37 states, plus the District of Columbia, exempt Social Security benefits from taxation. That includes the following 28 states and the nine that impose no income tax. (Source: The Tax Foundation):

• Alabama
• Arizona
• Arkansas
• California
• Delaware
• District of Columbia
• Georgia
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Mississippi
• New Jersey
• New York
• North Carolina
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• South Carolina
• Virginia
• Wisconsin

The remaining 13 states provide partial tax exemption of Social Security income, either based on age or income level or with some other form of modification:

• Colorado
• Connecticut
• Kansas
• Minnesota
• Missouri
• Montana
• Nebraska
• New Mexico
• North Dakota
• Rhode Island
• Utah
• Vermont
• West Virginia

Is it Better to Live in a State that Doesn’t Tax Retirement Benefits?

All things being equal, retirees are financially better off living in states that don’t tax retirement benefits. But as we all know, all things are almost never equal. So while state income taxes are an important consideration, they shouldn’t be the only deciding factor on where you should live out your golden years.

You also need to consider other types of taxes, such as sales and real estate taxes.

For example, New Hampshire is one of the states with no income tax, but it has the third highest property taxes in the country. In that case, the benefit of not paying income tax may be offset by higher property taxes. 

Housing prices are another consideration. The state of Washington has no income tax, but the median price of a house is $504,000. The cost of purchasing a home in Washington state could easily cancel out the benefit of tax-free retirement income.

Insurance is another factor. Florida has no income tax and is a popular destination for retirees. But the state also has the highest car insurance premiums in the country, at an average of $2,560 per year, and the highest average homeowner’s insurance premiums, at $6,000 per year.

All of this is to say that while the income tax impact on retirement is important, it’s hardly the only financial consideration if you want to move to a lower-cost state. Yes, living in a state that doesn’t tax retirement income is a major plus, but it can be offset by other costs that are not easily avoided.