These States Won’t Tax Your Social Security, 401(k), IRA, or Pension Income

After a lifetime of contributing to Social Security, building up a retirement plan, or earning a pension, you may be bracing for a big tax hit in retirement. Now you’re ready to punch your last time card and your state has its hand out for some tax dollars as well.

Or does it? While federal taxes are unavoidable, some states are much kinder than others when it comes to taxing retirement income. Others don’t tax it at all.

Key Takeaways

• Illinois, Iowa, Mississippi, and Pennsylvania are considered to be the most tax-friendly states for retirees.
• 38 states don’t tax Social Security income.
• 29 states don’t tax most military retirement pay.
• 15 states exempt pension income from state taxes.
• Eight states have no income tax at all.

States That Don’t Tax Retirement Income

Arkansas

Arkansas offers retirees a break by exempting up to $6,000 per year from public and private employer-sponsored pension plans and IRA distributions received after the age of 59½ or because of death or disability. It also doesn’t tax Social Security income or tax military retirement pay at all. Plus, Arkansas imposes no estate or inheritance tax, so your heirs won’t face additional tax burdens.

Illinois

Illinois is another state that is friendly to retirees. The state exempts pension income, 401(k) and IRA withdrawals, Social Security benefits, and military retirement pay from state taxes. However, Illinois does tax other investment earnings and taxes estates and inheritances.

Iowa

Iowa recently updated its tax laws to be more retirement-friendly. As of January 2023, the state no longer taxes pension, 401(k), or IRA income for residents over age 55. If you qualify, you can enjoy tax-free retirement income starting at age 55.

Mississippi

Mississippi spares retirement plan distributions, pension income, Social Security income, and military retirement pay from state taxes. Early distributions from retirement plans generally don’t qualify for exempt status. This state doesn’t have an estate or inheritance tax, either.

New Hampshire

New Hampshire doesn’t tax Social Security or pension income although it does tax retirement account distributions that qualify as interest or dividends. This state doesn’t have an income tax on earned wages and most distributions count as income so they’re exempt.

Notably, New Hampshire plans to repeal its tax on interest and dividends in 2025, making it even more attractive for retirees. Estate and inheritance taxes are also absent in New Hampshire.

Pennsylvania

Retirees in Pennsylvania benefit from a lack of state taxes on Social Security, pension income, and retirement plan distributions. In addition, Pennsylvania has a flat income tax rate of 3.07% on earned wages, one of the lowest in the nation. Eligible retirees can also access a property tax/rent rebate program, adding to the state’s appeal.

Important

Pennsylvania offers a property tax/rent rebate program to seniors.

South Carolina

South Carolina is another state that doesn’t tax Social Security income. As of tax year 2022, all military retirement pay is exempt from state income taxes. For those over age 65, the first $10,000 of retirement plan income is exempt from state tax, and the exemption drops to $3,000 for younger retirees. South Carolina also offers a $15,000 state tax deduction for those 65 and older.

States With No Income Tax

If you live in one of the following eight states, you won’t need to worry about state income taxes on any retirement income:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington (taxes only capital gains of high earners)
• Wyoming

These states offer automatic tax relief for retirees by not taxing any retirement income. It’s also worth noting that some of these states may still levy other taxes, such as property taxes or sales taxes, to make up for the lack of income taxes.

The Bottom Line

State taxes on retirement income vary widely, but several states make life easier for retirees by offering significant tax breaks on Social Security, 401(k) withdrawals, IRA distributions, and pensions. If you live in one of these states—or better yet, one of the eight states without any income tax—you’ll keep more of your hard-earned retirement income. While tax laws can change, it’s important to consider these factors when deciding where to retire.