Do You Live In A State That Won’t Be Taxing Your Retirement Income?


It probably isn’t surprising to you that taxes can be one of your biggest expenses while in retirement. Of course, this doesn’t make paying all those taxes less painful. The tax burden you bear on your retirement income can vary depending on where you live. Currently, there are just 12 states that take taxes out of your retirement income distributions. While I wouldn’t recommend someone move in retirement to save money on taxes, I would be remiss if I didn’t point out that tax planning doesn’t end once you retire.

Keep reading to find the 12 states that allow you to keep more of your retirement income. Remember that regardless of where in the U.S. you live, you will still owe federal taxes on your retirement income. You may also end up paying taxes to your state in other ways, like sales and property taxes.

The States Without Income Taxes

Distributions from your retirement accounts like your 401(k), IRA, or 403(b) (and even pension if you are lucky enough to have one) are considered income. Depending on your total household income in retirement, a good portion of your Social Security income will also be taxable. Earn enough money in retirement, and your Medicare premiums may skyrocket thanks to IRMAA.

Eight states have no income taxes. If you are lucky enough to live in one of these states, you could benefit from not owing taxes on your retirement account distributions. Remember, every state, big or small, still has expenses that need to be covered, so they will get their money somehow.

Eight states have no income taxes: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

New Hampshire also has no income tax, but it will levy taxes on interest and dividends, which can be a significant part of many retirees’ incomes. If all your interest and dividends are earned within retirement accounts (think IRA or 401(k)), you could still not have to pay New Hampshire’s state income tax on your retirement income.

States That Limit Taxes On Retirement Income

Beyond the nine states mentioned above that do not have income taxes, at least four more states reduce the taxes owed by retirees on their incomes. For example, Illinois has a flat tax rate of 4.95% and, in most cases, does not tax distributions from pensions, 401(k)s, or IRAs.

Similarly, Mississippi has a maximum state tax rate of 5% and doesn’t tax retirement plan distributions.

If you are a Georgia resident with a moderate-to-low income, there are some tax benefits for you in retirement. Your withdrawals from retirement accounts and pensions in Georgia may only be partially taxed. If you are age 65 or older, you can deduct up to $65,000 of retirement income from state taxation.

Lastly, Pennsylvania has a flat 3.07% tax on income, but it doesn’t take a cut of your retirement plan distributions.

State Taxes On Retirement Plan Income

State tax and retirement income exemptions vary from state to state. They can also vary by type of income or other factors, such as if you are earning a military pension (21 states don’t tax military retirement income).

How States Tax Your Social Security Income

If your income is low enough, some or potentially all of your Social Security benefits may escape federal income taxation. If you file as an “individual” and your combined income is between $25,000 and $34,000, you must pay federal income taxes on 50% of your Social Security income. Earn over $34,000, and 85% of your Social Security will be taxable. For those using “married filing jointly,” the numbers are a bit higher. Fifty percent of Social Security is taxable on incomes between $32,000 and $44,000. If your combined income is above $44,000, 85% of your Social Security will be taxable at the federal level.

Twelve states will tax some or all of your Social Security benefits. These include the states of Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

Be sure to speak with your proactive tax-planning financial planner before retirement to ensure you have a plan not to run out of money as you age. Minimizing taxes on your retirement income is a great way to help it stay invested and provide income for a longer period of time. Some states tax IRA distributions differently than pension distributions. You might change your choice of taking a pension versus rolling it over to an IRA if there are tax benefits one way or the other. If you are a small business owner in a state that doesn’t tax pension income, you may want to ask your Certified Financial Plannerä about the benefits of a Cash Balance Pension plan. It could help you increase retirement income and decrease your lifetime income taxes.

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