12 states that won't tax your retirement income

Retirees can save a lot of money in these states that completely exempt the most common types of retirement income – 401(k)s, IRAs and pensions – from taxation.

  • By Rocky Mengle,
  • Kiplinger
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You've worked hard all your life, and now you're retired (or will retire soon). Unfortunately, there's a pretty good chance that Uncle Sam is going to take a cut of your 401(k), traditional IRA or pension income. But what about your state? Will it take a bite out of your retirement income, too?

Most states tax at least a portion of retirement income (not counting Social Security benefits). Your state might offer some tax breaks, but those breaks usually have limitations based on your age and/or income. A few states, however, completely exempt the most common types of retirement income—401(k)s, IRAs and pensions—from taxation. That's a huge plus for retirees living in those states.

Here are 12 states where you don't have to pay tax on any of your 401(k), IRA or pension income (listed alphabetically). If you live—or plan to live—in one of these states, you can stretch your retirement savings quite a bit further.

Alaska

Retirement income: Alaska usually isn't the first place that comes to mind when you think about places to retire. But if you live there, none of your 401(k), IRA or pension income will be taxed. That's because the Last Frontier doesn't have an income tax. Yeah, it can be cold, but the Alaska tax code is pretty good to the state's senior citizens.

Social Security benefits: Like most states, Alaska does not tax Social Security benefits.

Income tax range: Not applicable (no income tax).

Inheritance and estate taxes: Alaska doesn't have an inheritance tax or an estate tax.

Florida

Retirement income: Sunshine, palm trees, sandy beaches … what more could you want in a retirement destination? How about no taxes on your 401(k), IRA or pension income? That's what you get in Florida, because the Sunshine State doesn't have an income tax.

Social Security benefits: Florida doesn't tax Social Security benefits, either.

Income tax range: Not applicable (no income tax).

Inheritance and estate taxes: There are no inheritance or estate taxes in Florida.

Illinois

Retirement income: Overall, Illinois is one of the least tax-friendly states for retirees. However, it's the only Midwestern state that completely exempts 401(k), IRA and pension income from tax. Pension and 401(k) income must be from a qualified employee benefit plan to be tax-free, though.

Social Security benefits: The Prairie State doesn't tax Social Security benefits, either.

Income tax range: The Illinois income tax rate is a relatively low, flat 4.95%.

Inheritance and estate taxes: Illinois has an estate tax for estates worth more than $4 million.

Mississippi

Retirement income: If you're at least 59½ years old, the Magnolia State won't tax your retirement income. However, the state will take its share of 401(k), IRA or pension income received by those who retire early.

Social Security benefits: Mississippi won't tax your Social Security benefits.

Income tax range: For the 2020 tax year, Mississippi's lowest tax rate is 3% (on taxable income from $3,001 to $5,000), and its top rate is 5% (on taxable income of more than $10,000).

(Note: The 3% rate is gradually being phased out. Starting in 2022, the lowest rate will be 4%, which will be applied to taxable income from $5,001 to $10,000.)

Inheritance and estate taxes: Don't worry about inheritance or estate taxes if you live in Mississippi. The state doesn't impose those taxes.

Nevada

Retirement income: Why gamble with your finances in your golden years? Move to Nevada, where the state won't tax your 401(k), IRA or pension income—or any of your other income, for that matter, because it doesn't have an income tax.

Social Security benefits: Social Security recipients hit the jackpot in Nevada. That's because Social Security benefits are tax-free in Nevada.

Income tax range: Not applicable (no income tax).

Inheritance and estate taxes: Nope—those taxes don't exist in Nevada.

New Hampshire

Retirement income: If you want to live in New England during your golden years, try New Hampshire. It's the only state in the region without a general income tax. Instead, the state imposes a tax on interest and dividends. With no broad income tax, you can completely avoid state tax on payments from your 401(k) plan, IRA or pension if you retire to New Hampshire.

Social Security benefits: New Hampshire doesn't tax your Social Security benefits, either.

Income tax range: A flat 5% tax on interest and dividends only.

Inheritance and estate taxes: New Hampshire doesn't collect inheritance or estate taxes.

Pennsylvania

Retirement income: As Ben Franklin once said, "a penny saved is a penny earned." Retirees can save a lot of pennies in Pennsylvania, because the Keystone State doesn't tax pension income from an eligible employer-sponsored retirement plan (except if you retire early). Payments from a 401(k) plan or IRA after retiring also avoid state taxation (again, except in early retirement).

Social Security benefits: Social Security benefits aren't taxed by Pennsylvania.

Income tax range: Pennsylvania has a low, flat income tax rate of 3.07%. However, municipalities and school districts can tax your income, too.

Inheritance and estate taxes: Pennsylvania does have an inheritance tax that ranges from 4.5% to 15%, depending on a recipient's relationship to the deceased and their age.

South Dakota

Retirement Income: If you like wide-open spaces, South Dakota might be the place for you. With no income tax and no tax on 401(k), IRA or pension income, it's also a great place to stretch your retirement savings.

Social Security benefits: There's also no South Dakota tax on Social Security benefits.

Income tax range: Not applicable (no income tax).

Inheritance and estate taxes: Like most states, South Dakota doesn't impose an inheritance or estate tax.

Tennessee

Retirement income: Tennessee's income tax is very limited; it only covers interest and dividends. As a result, retirees in the Volunteer State don't pay tax on their 401(k), IRA or pension income.

Social Security benefits: Tennessee retirees also collect Social Security benefits without paying state tax on them.

Income tax range: For 2020, there's a flat 1% tax on interest and dividends only. The rate goes down to 0% in 2021 and later. Plus, all your income is exempt from tax if you or your spouse (for joint returns) are at least 100 years old.

Inheritance and estate taxes: Tennessee doesn't have an inheritance or estate tax.

Texas

Retirement income: Don't mess with Texas … and Texas won't mess with your retirement income. Because the Lone Star State doesn't have a personal income tax, it will keep its hands off your 401(k), IRA and pension income, too.

Social Security benefits: Of course, because there's no income tax, there's no tax on your Social Security benefits in Texas, either. So, feel free to spend some of that money on a ten-gallon hot or a set of spurs instead of state taxes.

Income tax range: Not applicable (no income tax).

Inheritance and estate taxes: There are no inheritance or estate taxes in Texas.

Washington

Retirement income: If you like a good cup of coffee, consider retiring in Washington State. If you're not sold on the coffee, maybe you'll think again when you learn that the Evergreen State doesn't have an income tax. That means none of your 401(k), IRA or pension income is going to take a state tax hit.

Social Security benefits: Social Security benefits escape taxes in Washington, too.

Income tax range: Not applicable (no income tax).

Inheritance and estate taxes: Well, no state is perfect. For 2020, Washington taxes estates with a value of at least $2.193 million (the exemption threshold is subject to adjustment each year for inflation). The state doesn't have an inheritance tax, though.

Wyoming

Retirement income: Wyoming is very taxpayer-friendly when it comes your retirement income—no taxes on payments from 401(k) plans, IRAs or pensions. Why? The Cowboy State doesn't have an income tax.

Social Security benefits: Wyoming won't take a share of your Social Security check, either.

Income tax range: Not applicable (no income tax).

Inheritance and estate taxes: Don't worry about them. Wyoming doesn't impose an inheritance or estate tax.

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© 2020 The Kiplinger Washington Editors, Inc.
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