States That Don’t Tax Retirement Income

Eight states currently don’t tax any income, including retirement income.

In addition, New Hampshire taxes only interest and dividends, but this will end in 2027, according to New Hampshire’s Department of Revenue Administration.

State taxes are a major consideration for retirement planning. Differences in state taxes on retirement income can result in big differences in spendable income. This is especially true for high earners.

For example, a person in Florida, where there is no income tax, will take home more money than a person who makes the same amount of money in California, which has the highest state income tax rate of 13.3%. The difference in taxes of these two states can be thousands, or even tens of thousands, of dollars.

Of course, income tax is not the only tax that affects retirees. There are also state sales, excise (e.g., gasoline and cigarette), property, estate and inheritance taxes to consider.

Defined benefit pensions based on earnings and years of service can provide a significant chunk of retirement income. This is especially true for high-earning, long-tenured workers. Six-figure annual pension benefits are not unheard of. There are fifteen states that don’t tax pensions. The nine listed above, plus six more.

In addition to the nine states without income tax and the six that exempt pensions, 16 other states exempt military retirement pay.

Eleven more states with a state income tax only partially tax military retirement pay.

Retirement plans that fall under this umbrella include 401(k) plans for employees of for-profit companies, 403(b) plans for teachers and non-profit sector employees, 457 plans for state and local government workers, and the thrift savings plan (TSP) for federal government workers and service members.

In addition to the nine states listed above that don’t tax any income, three states specifically do not tax these tax-deferred savings plans.

Traditional IRA deposits made with pre-tax dollars accumulate tax-deferred until withdrawal. Withdrawals are taxed as ordinary income and are mandatory at age 73 if you were born between 1951 to 1959, or 75 if you were born after 1959 when required minimum distributions (RMDs) begin.

Roth IRA contributions are made with after-tax dollars and withdrawals are tax free if an investor reaches age 59 1/2 and the account has been open for at least five years

The same three states that do not tax income from tax-deferred employer plans also do not tax income from IRAs and annuities, for a total of 12 tax-free states.

Over three quarters of U.S. states do not tax Social Security benefits. Only 12 states currently do. Excluded benefit amounts vary from state to state and many only tax the benefits of more affluent taxpayers. Once a new law takes effect in Missouri in 2024, only 11 states will still tax benefits.

To paraphrase the band The Clash, “should you stay (put) or should you go?”

Tax savings is only one factor to consider with a relocation. Other key factors are social support networks, weather, community services and features in a new location. You will want to consider friends and family, doctors and hospitals, airports, parks and recreation, museums and theaters, and opportunities for work, education and volunteering.

The table below summarizes pros and cons of relocating to a state with no tax on retirement income. Note that not all moves have to be long distance. Georgia to Florida or New Jersey to Pennsylvania, for example, are not as drastic as a cross-country move.

The type of retirement income that’s taxed depends on the state. California, for example, taxes all retirement income, while Florida does not tax any.

Many high earners relocate for a more favorable tax climate. This has been called “The Great Wealth Migration.” The top five states for net negative outflows of wealth are California, New York, Illinois, New Jersey and Massachusetts. The states with the highest wealth inflows are Florida, Texas, Arizona, Colorado and North Carolina.

While important, income taxes are only one factor to consider in a potential relocation.

A few ways to reduce tax obligations in retirement include delaying Social Security, opening a health savings account, utilizing long-term capital gains, donating to charity, utilizing a Roth IRA and investing efficiently.

Even if you live in a state with no retirement income tax, these tips can still help reduce the impact of federal income taxes.

Editor Bianca Dagostino contributed to this article.