States differ widely in the way they tax retirement income, so location is an important consideration in financial planning for retirement. Some states do not tax any type of retirement income, while others tax IRA and 401(k) distributions, pension payments and even Social Security payments as ordinary income. However, income taxes are only part of the story, as some states that have low or no income taxes have high property, sales, and other taxes. Consider working with a financial consultant When you plan for retirement make sure you avoid any unnecessary taxes.
Income tax basics for retirement
Most retirement income can be subject to federal income taxes. That includes Social Security benefitsand pension payments and distributions from IRA and 401(k) plans. Exceptions include distributions from Roth IRA And Roth 401(k) plans. Federal income taxes are paid on Roth contributions before contributions are made. These contributions, plus any investment gains, can be withdrawn free of federal income taxes after five years if you reach age 59 and a half.
The situation is more complicated when it comes to how states tax your income. Many states do not charge income tax at all, so all retirement income, as well as other income, is exempt from state taxes. Most states specifically exclude Social Security benefits from taxes. Others also exempt distributions for retirement accounts and pensions. Most of them have a combination of methods for taxing retirement income.
Now that you have a good basic knowledge of how state retirement taxes work, let’s dive into the states that won’t tax you at all.
States that do not tax retirement income
Eight states have it No state income tax. These eight states – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – do not tax wages, salaries, dividends, interest or any type of income.
The lack of a state income tax means that these states also do not tax Social Security retirement benefits, pension payments and distributions from retirement accounts. Even income from securities held in non-retirement brokerage accounts is free of any state income tax in these states. This means that retired residents of these states have no qualms about paying state income taxes on their income from any source.
another country, New Hampshire, has no state income tax on wages, salaries, retirement account withdrawals, or pension payments. But New Hampshire currently taxes dividends and interest, which are likely sources of income for some retirees with assets outside of retirement accounts.
The rest of the states take a variety of approaches to taxing retirement income. Some taxes on all retirement income, including Social Security. Others exempt Social Security but tax sources such as pensions and retirement account income if the retiree’s income exceeds a certain threshold. But the following states do not tax retirement income of any kind.
11 states do not tax retirement income Alaska There is no state income tax 2. fl There is no state income tax 3. Illinois Retirement income is exempt, including Social Security, annuities, IRA, and 401(k)4. Mississippi Retirement income is exempt, including Social Security, annuities, IRA, and 401(k)5. nv No state income tax 6. Pennsylvania Retirement income is exempt, including Social Security, annuities, IRA, and 401(k)7. South Dakota No state income tax 8. Tennessee No state income tax 9. Texas No state income tax 10. Washington No state income tax 11. Wyoming No state income tax
States with small retirement tax requirements
Some states that don’t appear on this list that don’t tax retirement income at all are still relatively generous when it comes to letting retirees out of the tax circle. For example, Georgia It does not tax Social Security retirement benefits and also provides a deduction of up to $65,000 per person on all other types of retirement income.
Also in Pennsylvania All Social Security benefits, IRA income, and 401(k) are exempt. The Keystone State does not charge income tax on pension payments to those over the age of 60. Clearly, taxing retirement income is rather complicated. One of the biggest differences between states is the variety of income caps for qualifying for exemptions.
In addition, taxation of retirement benefits is a moving target. State tax laws change over time. For example, New Hampshire’s 5% tax on dividends and interest is scheduled to be phased out by January 2027. Until then, New Hampshire’s tax rate on dividends and interest income drops each year until it reaches zero.
Eleven states impose no income taxes on retirement income from any source. Others provide resident retirees with varying degrees of tax credits on Social Security, retirement account distributions, pension payments and other types of retirement income. Some exemptions are generous enough that many retirees in those states will not pay any income tax. Details such as the pensioner’s income are important It varies by countryso it’s important to check with your state tax office for details before moving in to save on taxes.
A financial advisor can help you balance taxes and other considerations associated with choosing a place to retire. Finding a qualified financial advisor is not difficult. Free SmartAsset tool It matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to determine the right one for you. If you are ready to find a counselor who can help you achieve your financial goals, let’s start.
There’s more to planning for a secure and comfortable retirement than avoiding all state taxes on retirement income. States may not tax retirement income but have otherwise high taxes. Read more about retirement taxes.
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