Which States Do Not Tax Retirement Income?

Wondering Which States Do Not Tax Retirement Income?

A comfortable retirement life is a dream for many working professionals. However, as you plan for your financial future, one factor you might not consider is state taxes on retirement income. The prospect of paying taxes during retirement can sour your attitude and make retirement seem like a chore rather than a vacation. Luckily, not all states tax your retirement income, and certain states will tax your income at reduced rates.

Figuring out which states can minimize your retirement income tax bill is essential but complex for many people unfamiliar with the retirement income tax system. This article will help you understand the ins and outs of tax retirement income, including which states do not tax retirement income and how you can plan for the ones that do.

Understanding Retirement Income Taxes

Many forms of retirement income are subject to federal income taxes. Among the income sources that are typically considered taxable include the following:

• Your Social Security benefits
• Existing pension payments
• Distributions from 401(k)s and IRAs

While these sources are generally taxable in your retirement, this isn’t always the case. For example, distributions received through Roth IRAs and 401(k)s are tax-free, as you contribute federal income taxes on these accounts before withdrawing them.

Additionally, understanding retirement income taxes becomes more complicated when considering that many states combine various approaches to taxing retirement income. For example, some states only tax specific sources, while others tax everything but Social Security benefits or nothing at all.

States With No Income Tax

Some states do not tax your retirement income–however, eight states have no income tax entirely, making them popular among individuals looking to avoid hefty taxes in retirement and present. The following are the states with no income tax pre- or post-retirement:

1. South Dakota
2. Tennessee
3. Alaska
4. Florida
5. Nevada
6. Texas
7. Washington
8. Wyoming

States That Don’t Tax Retirement Income

Along with the eight states mentioned above, four additional states do not tax your retirement income. While you have to pay federal income taxes before retirement, you can guarantee a comfortable retirement in the following no-retirement tax states:

• Illinois: Illinois charges a state income tax rate of 4.95%. Retirement income is exempt from this tax, including pension payments, 401(k) and IRA distributions, and Social Security payments.
• Iowa: As of 2023, Iowa residents over 55 are no longer taxed on their retirement income. Iowa’s state tax rates fall between 4.4-6%, with plans to narrow the rates in successive years.
• Mississippi: State income tax rates in Mississippi are between 0-5%, and retirement income is exempt from these charges, provided that the individual meets the requirements of their plan.
• Pennsylvania: Pennsylvania’s income tax rate is 3.07%, with retirement income exempt if all plan requirements are met.

States Where Things Get Trickier

Unfortunately, not all states make it easy to determine what they will and won’t tax in your retirement income. Below is a state breakdown with specific exclusions that could minimize your retirement income tax bill.

States That Don’t Tax Social Security Payments

Most states do not require retirement income taxes on any Social Security benefits, making it easier if you’re looking for places that specifically exclude Social Security benefits from taxation.

However, the following twelve states tax their residents’ Social Security benefits in some capacity:

1. Connecticut
2. Colorado
3. Minnesota
4. Kansas
5. Missouri
6. Montana
7. New Mexico
8. Nebraska
9. Rhode Island
10. Vermont
11. Utah
12. West Virginia

States That Don’t Tax Pension Income

Many people choose pensions as a means of income during retirement. The following states don’t tax retirement pension income:

1. Alaska
2. Iowa
3. Florida
4. Nevada
5. Tennessee
6. Texas
7. South Dakota
8. New Hampshire
9. Wyoming
10. Washington
11. Illinois
12. Alabama
13. Hawaii
14. Mississippi
15. Pennsylvania

States That Don’t Tax Your IRA and 401(k) Plans

Many people use income collected through 401(k) plans, IRA accounts, pensions, andannuitiesas a source of retirement income. If you’re planning on funding your retirement through funds accumulated in a traditional IRA or 401(k) plan, consider the following states that don’t tax these plans:

1. Pennsylvania
2. Illinois
3. Alaska
4. Mississippi
5. Florida
6. Nevada
7. South Dakota
8. New Hampshire
9. Texas
10. Washington
11. Tennessee
12. Wyoming

States That Don’t Tax Pensions But Do Tax 401(k)s and IRAs

In very few cases, some states will tax your IRA and 401(k) plans but not your pensions. The conditions that follow this rule are the following:

1. Hawaii
2. Alabama

States With Minimal Tax Requirements

If you’re planning on living in a state that does tax retirement income, there are still options to save money. Certain conditions have minimal tax requirements, making them far more affordable than states with multiple requirements and high fees. Below is a closer look at some states with less severe tax rates than other locations.

Georgia

While Georgia is not exempt from retirement income taxes, residents are not taxed on their Social Security retirement benefits. The state also offers a deduction of up to $65,000 per person on all types of retirement income.

Pennsylvania

Pennsylvania residents can enjoy the benefits that this state offers for retirement. All Social Security benefits, 401(k) plans, and IRA income are exempt from taxation in your retirement. Additionally, Pennsylvania does not levy any income tax on your pension payments if you’re over 60.

Arkansas

In Arkansas, residents can benefit from a $6,000 exemption for public or private employee retirement income. Additionally, all railroad and military retirement income applies to this exemption.

New York

New York helps residents manage retirement income taxes by excluding $20,000 of annuity and retirement payments for residents over 59 ½. New York also excludes this cost for individuals with government pension income from the United States, New York, or New York localities.

South Carolina

South Carolina determines tax limitations on retirement income based on the taxpayer’s age. Therefore, taxpayers 65 and older can subtract $10,000 from their retirement income.

Colorado

Like South Dakota, Colorado allows taxpayers over 65 to subtract from their retirement income. However, Colorado allows a subtraction of up to $24,000.

How Else Can I Avoid Retirement Income Taxes?

Other than retiring in one of the states that don’t tax your retirement income, you can consider using aRoth IRA or 401(k)account to avoid paying taxes when withdrawing your retirement income. With Roth accounts, individuals pay taxes at a current tax rate, meaning they can start their savings tax-free in retirement. While you still have to pay taxes on your savings, this is a viable option to avoid paying in retirement, especially given that you may owe more depending on your future tax bracket.

If Your Social Security Benefits are Below the Threshold

Suppose your Social Security benefits are below the payment threshold. In that case, you will not owe any retirement taxes on your Social Security plan. Your Social Security income is taxable once it reaches the following thresholds:

• Up to 50% of the Social Security benefit for single filers with income between $25,000-$34,000
• Up to 85% of the use for single filers with income exceeding $34,000
• Taxable up to 50% of the Social Security benefit for joint filers with a combined income between $32,000 and $44,000
• Taxable up to 85% of the benefit for joint filers with a combined income exceeding $44,000

Tips to Prepare for Retirement Income Taxes

Beyond knowing which states do not tax retirement income, it’s essential to have some tips to prepare yourself for a secure financial future. If you live in a state where your retirement income is taxed, consider the following suggestions.

1. Plan: Be aware of the taxes you will owe on your retirement income and plan accordingly. Determine your retirement income sources and consult your attorney, financial advisor, or certified public accountant to develop a thorough plan.
2. Withdraw strategically: When withdrawing from a 401(k) or IRA account in retirement, be strategic about the timing and the amount you’re withdrawing. Suppose you have a Roth 401(k) or IRA. In that case, this isn’t a concern–however, remember that early withdrawal will incur a penalty fee.
3. Consider converting: If you have a traditional IRA or a 401(k) account but don’t want to pay retirement income taxes, consider converting your current plan into aRoth account. Taxes will apply to the conversion, but this could save you money long-term.
4. Stay informed: Tax laws and regulations often fluctuate, which could alter your retirement plan. Stay informed about relevant tax changes that could impact your retirement income taxes.
5. Plan for Required Minimum Distributions: A traditional IRA or 401(k) plan has a Required Minimum Distribution (RMD), meaning you must withdraw once you reach a specific age. Plan for RMDs and understand their tax implications.
6. Work with a professional: It’s essential to emphasize working with a tax professional, such as an attorney, CPA, or financial advisor, when deciding about your retirement income. These professionals can offer personalized advice to ensure that you make the best decision for your financial well-being.