These are The States That Do Not Tax Retirement Income — But Which is More Affordable?

Summary

Retirement income is typically made up of Social Security benefits, pensions, military retirement pay, and private retirement accounts, such as IRAs and 401(k)s. The majority of the states in the U.S. do not tax Social Security or veterans’ retirement income, with some exceptions. There are also a few states that do not tax pension income, as well as 401(k)/IRA distributions. When looking at states that seem ideal for retirement in terms of tax breaks, it’s also important to look at the general cost of living. If your priority is to stretch your retirement income as much as possible, you may find that a state like Wyoming, with a low cost of living combined with generous tax breaks, makes sense.

Choosing a place to retire once those hairs grow progressively gray is an important (and a little daunting) task. Some retirees choose to retire in Latin America, Europe or Southeast Asia for the considerably lower cost of living versus the United States. However, the majority of retirees want to stay in the country so they can be close to family, as well as enjoy the creature comforts of the American system. Therefore, if you will retire in the United States, you should consider both taxes and the cost of living when choosing a state. Hawaii, for example, does not tax pensions but has the highest cost of living of any state in the nation. In this article, we will delve into some of the states that offer the best state (not federal) tax incentives for retirees, as well as the cost of living in these states.

States that don’t tax retirement income

Retirement income is a broad term that includes several sources of income, such as Social Security benefits, military retirement pay, pensions, 401(k)s and IRAs. So, we will need to break things down a little.

The vast majority of states do not tax Social Security benefits, which you will receive if you’ve paid into the system before retirement. These benefits are drawn tax-free and are not treated as ordinary income. The same goes for veterans’ retirement in the 37 states that do not tax any income derived from veterans‘ benefits. When it comes to corporate retirement pensions and government-incentivized savings plans such as a 401(k) or IRA, your options narrow. Of the 50 states plus Washington, D.C., 14 do not tax private pensions in which the retiree receives money from a past employer. Of those 14 states, 12 states do not tax distributions from 401(k) or IRA plans.

States that don’t tax Social Security benefits

As long as you’ve paid into the Social Security system and been a U.S. resident or citizen for the requisite amount of time, income derived from Social Security benefits will likely be a mainstay of your retirement income.

Here are the 41 states in the U.S. that do exempt Social Security income from tax.

States that don’t tax veterans’ (military) retirement pay

The majority of states also do not tax military retirement income. These are the 34 states (and D.C.) that don’t tax veterans’ retirement pay.

States that don’t tax pensions

There are 14 states in the U.S. that do not levy any state income tax whatsoever on earnings derived from a pension. In most cases, this will be a private pension that you receive when you retire after working for a company like G.E., for example. In some cases, it can also be a government pension if you’ve been in government or public service throughout your career.

These states do not tax pensions: Alaska, Alabama, Arizona, Florida, Hawaii, Illinois, Mississippi, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

States that don’t tax IRA or 401(k) income

Of the 14 states that do not tax pensions, there are 12 that do not tax income derived from 401k or IRA distributions. The two states that do not offer tax-exempt retirement accounts income are Alabama and Hawaii.

These states offer tax-free incentives on pensions AND IRA/401(k) distributions: Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming.

States with no income tax

Additionally, some states do not have any income tax. These are: Alaska, Florida, Nevada, New Hampshire (doesn’t tax earned wages, but does tax investment earnings), South Dakota, Tennessee, Texas, Washington, Wyoming

Pro Tip

When you’re deciding where to retire, location is important, too. As people’s children and grandchildren can end up anywhere in the U.S., a central location might be best. For example, although Alaska offers great tax incentives, it’s far from other states. You might want to stick to a more central location, such as Wyoming or South Dakota, which have a cheaper cost of living to boot.

Compare the tax benefits

Now let’s put it all together. Starting with the 14 states that do not tax pension income, you can also see which states do or don’t tax 401(k)/IRA distributions and which states have no income tax.

StatePensionSocial Security401(k)/IRAIncome
AlabamaNoNoYesYes
AlaskaNoNoNoNo
FloridaNoNoNoNo
HawaiiNoNoYesYes
IllinoisNoNoNoYes
MississippiNoNoNoYes
NevadaNoNoNoNo
New HampshireNoNoNoNo
PennsylvaniaNoNoNoYes
South DakotaNoNoNoNo
TennesseeNoNoNoNo
TexasNoNoNoNo
WashingtonNoNoNoNo
WyomingNoNoNoNo

Be sure to factor in the cost of living

When choosing a place to retire, tax breaks aren’t everything. As you may have to live on a set amount of income, carefully choosing a place where you can afford to live a comfortable life is paramount. For example, let’s look at Florida.

Florida

Florida offers tax-free incentives on virtually any income derived for retirement. This includes the ability to receive Social Security benefits, military retirement benefits, pension income, 401(k) income, and IRA income tax-free. Florida, however, can be an expensive place to live, particularly when it comes to rent and property prices. This puts the cost of living at over $3,000 per month, which is among the highest of any of the 12 pension and IRA/401(k) tax-free states. Plus, $100 is also only worth $99 in Florida when you take into account purchasing power parity, or PPP. If you want a lower cost of living, you might want to consider a place like Wyoming.

Wyoming

Wyoming offers tax-free incentives on virtually any income used for retirement, just like Florida. This includes the ability to receive Social Security benefits, military retirement benefits, pension income, 401(k) and IRA income tax-free. However, Wyoming has one of the lowest costs of living in the nation, and among the 14 states that don’t tax retirement income, it’s among the absolute lowest. At $2,000 a month, you can get by with the bare necessities in Wyoming. And $100 in Wyoming will be worth $107 in terms of purchasing power parity as well.

Compare the costs of living

Again, using the 14 states that don’t tax pension income, we will look at their various living expenses. This includes the median rent (according to Zillow), monthly food and health insurance costs for an individual, the total cost of living, and the value of $100 in each state.

As you can see, the cost of living in a place like Hawaii is likely to eat up most if not all of your tax benefits. But if you opt to live on the Gulf Coast of Mississippi or Alabama, you’ll save on both taxes and cost of living.


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FAQ

What is the most tax-friendly state for retirees?

There are nine states that do not tax Social Security benefits, military retirement income, pensions, 401(k)s or IRAs and they have no state income tax. They are Washington, Nevada, Wyoming, South Dakota, Texas, Tennessee, Florida, New Hampshire, and Alaska. If you factor in the cost of living in those states, Wyoming and South Dakota rise to the top.

What is the best state to live on Social Security?

There are so many states that don’t tax Social Security that it’s better to frame this as a cost-of-living question. Wyoming, South Dakota, Alabama, and Mississippi are among the states with the lowest cost of living combined with tax breaks.

What is the No. 1 state for retirees?

Many people consider it to be Florida. It has warm weather, beautiful beaches, and low taxes. However, when you factor in the cost of living, Florida comes in as one of the most expensive states at No. 13 out 14.

What is the cheapest state to live in when you retire?

If you factor in both tax breaks as well as cost of living, South Dakota takes the top spot according to the data we have gathered.

Key takeaways

  • The majority of states do not tax Social Security or veterans’ retirement income. There are also 14 states that do not tax pension income, and 12 that do not tax 401(k)/IRA distributions.
  • There are nine states that also do not have a state income tax.
  • When choosing where to retire, you should also consider the cost of living in that state.
  • Wyoming and South Dakota have some of the lowest costs of living while Florida and Hawaii have some of the highest.
View Article Sources
  1. 14 States That Don’t Tax Pension Payouts – AARP.org
  2. 5 Sources of Retirement Income – SuperMoney
  3. Tax Evasion vs. Tax Avoidance — Difference & Examples – SuperMoney
  4. What is a Pension and How Does it Work? – SuperMoney