Retirees can keep more of their income in certain states that offer exemptions on Social Security, pensions, and military retirement pay-while nine states skip income tax entirely, affecting how far retirement savings stretch
For Americans approaching retirement, state tax policy can have a significant impact on how much of their nest egg remains available for living expenses. While federal taxes on retirement income are unavoidable, state-level rules vary widely, with some states offering generous exemptions for Social Security, pensions, and other retirement income. Understanding these differences is crucial for retirees seeking to maximize their after-tax income and minimize surprises.
Most states do not tax Social Security benefits, but the treatment of other retirement income-such as pensions, 401(k) withdrawals, and IRA distributions-differs sharply. Some states provide targeted exemptions, while others impose flat or progressive income taxes on most forms of retirement income. A handful of states go further, eliminating income tax altogether, which can be a decisive factor for those considering relocation in retirement.
States With Notable Retirement Tax Breaks
Several states stand out for their retiree-friendly tax policies. Arkansas exempts up to $6,000 per year from employer-sponsored pension plans and traditional IRA distributions for those over 59½, and does not tax Social Security or military retirement pay. Illinois excludes pension income, 401(k) and IRA withdrawals, Social Security, and military retirement pay from state taxes, though it does tax other investment earnings and imposes estate and inheritance taxes.
Iowa, after recent reforms, no longer taxes pension, annuity, or IRA income for residents over 55 and has moved to a flat tax system. Mississippi exempts most retirement plan distributions, pensions, annuities, Social Security, and military retirement pay, but early withdrawals may not qualify. New Hampshire does not tax Social Security or pension income and, as of 2025, has repealed its tax on interest and dividends. Pennsylvania exempts Social Security, pension income, and retirement plan distributions, though it maintains a flat income tax and offers a property tax/rent rebate for older adults. South Carolina exempts Social Security and all military retirement pay from state income tax.
States With No Income Tax
Nine states-Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington (which taxes only capital gains for high earners), and Wyoming-do not levy a state income tax. For retirees, this means that all forms of retirement income, including Social Security, pensions, and withdrawals from retirement accounts, are free from state income tax. However, these states may rely more heavily on property or sales taxes to fund public services, so the overall tax burden can still vary.
According to the Internal Revenue Service, federal taxes on retirement income remain in place regardless of state residency. Retirees should also consider other state-level taxes, such as estate, inheritance, and property taxes, which can affect the total cost of living. For those weighing a move, it's important to look beyond income tax rates and assess the full tax landscape, including how states treat investment income and required minimum distributions.
Key Age and Income Considerations
There is no federal or state age at which retirees automatically stop paying taxes on pension income. Most pensions are subject to federal income tax, and state taxation depends on local law. Required minimum distributions (RMDs) from traditional IRAs and certain retirement plans begin at age 73, and failing to take RMDs can result in significant penalties. Strategic withdrawal planning-such as drawing from taxable accounts first or converting traditional IRA funds to a Roth IRA-can help manage taxable income and potentially reduce future tax bills.
Social Security benefits may be taxed at the federal level if a retiree's combined income exceeds certain thresholds. For single filers, up to 50% of benefits may be taxable if combined income is between $25,000 and $34,000, and up to 85% if above $34,000. For married couples filing jointly, the thresholds are $32,000 and $44,000. State taxation of Social Security is less common, with only a minority of states imposing any tax on these benefits.
Planning for Tax-Efficient Retirement
Retirees can take several steps to reduce their tax burden, including timing withdrawals, considering Roth conversions, delaying Social Security benefits, and making qualified charitable distributions. Choosing a tax-friendly state can also make a substantial difference, but it's only one factor among many-housing costs, healthcare access, and proximity to family may be equally important. For couples, the amount needed to retire comfortably can vary widely by state, as explored in this analysis of retirement savings requirements across the U.S..
According to the Social Security Administration, the average monthly Social Security benefit for retired workers was $1,907 as of January 2024. The IRS reports that the penalty for missing an RMD is 25% of the amount not withdrawn, though this can be reduced to 10% if corrected in a timely manner. These figures highlight the importance of understanding both federal and state tax rules when planning for retirement income.
State tax policy is only one piece of the retirement planning puzzle. While moving to a state with no income tax or generous exemptions can help retirees keep more of their income, the overall financial impact depends on a combination of factors. Property taxes, sales taxes, healthcare costs, and local living expenses can offset or even outweigh the benefits of lower income taxes. Retirees should evaluate the full cost of living, consider their own income mix, and consult with a qualified tax or financial advisor before making major decisions about where to spend their retirement years.
