13 States That Offer Tax-Free Retirement Income: A Comprehensive Guide for Retirees

Planning Your Tax-Efficient Retirement Across States

When retirement planning, one often overlooked strategy is considering relocation to states that do not tax retirement income. This decision can significantly impact your post-work finances. Fortunately, 13 U.S. states provide meaningful tax advantages for retirees by exempting retirement income entirely from state taxation.

The 13 States That Don’t Tax Retirement Income

These states that do not tax retirement offer comprehensive exemptions on retirement distributions:

Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming each exclude retirement income from state taxation.

What exactly does this tax exemption cover? It encompasses Social Security benefits, 401(k) plan withdrawals, IRA distributions, and pension payments—essentially all major sources of retirement income are protected from state income taxes.

However, federal income taxes remain unavoidable. Regardless of which state you inhabit, the U.S. government requires retirees to pay federal income taxes on qualified retirement distributions.

Understanding the Two Categories of Retirement-Friendly States

States with No State Income Tax (Nine States)

Nine of the 13 states that do not tax retirement achieve this through broader tax policy: they don’t impose state income tax on anyone. These jurisdictions include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Washington presents an interesting exception: while retirement benefits escape taxation, the state does tax capital gains. A 2024 ballot initiative to eliminate this capital gains tax failed to gain sufficient voter support.

States with Targeted Retirement Tax Exemptions (Four States)

Illinois, Iowa, Mississippi, and Pennsylvania have implemented specific tax policies favoring retirees rather than eliminating state income tax entirely.

A critical consideration: Mississippi and Pennsylvania both tax early distributions from retirement accounts, meaning distributions before age 59½ may face state-level penalties in addition to federal consequences.

Partial Retirement Tax Benefits in Other States

Beyond the 13 states that do not tax retirement, numerous states offer partial exemptions. Over 25 additional states exclude Social Security benefits from taxation, including Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Indiana, and others.

Alabama extends benefits further by also exempting pension income from defined benefit retirement plans. Hawaii provides targeted relief by excluding distributions from private and pension plans funded through employee (rather than employer) contributions.

Federal Tax Implications for Retirees

While states that do not tax retirement offer significant savings, federal taxation remains applicable to most retirees. The federal government does provide one important benefit: partial exemption for Social Security income.

The percentage of Social Security benefits subject to federal income tax depends on your “combined income” (calculated as adjusted gross income plus nontaxable interest plus one-half of Social Security benefits) and filing status:

For Individual Filers:

• Combined income below $25,000: No taxation on Social Security
• Combined income $25,000–$34,000: Up to 50% of benefits taxable
• Combined income exceeding $34,000: Up to 85% of benefits taxable

For Married Filing Jointly:

• Combined income below $32,000: No taxation
• Combined income $32,000–$44,000: Up to 50% of benefits taxable
• Combined income exceeding $44,000: Up to 85% of benefits taxable

For Married Filing Separately: Up to 85% of benefits are subject to taxation regardless of combined income level.

Future Policy Considerations

During recent policy discussions, proposals emerged suggesting potential elimination of federal income taxes on all Social Security benefits. Should such changes materialize, retirees could substantially increase their after-tax retirement income.

Combining state-level advantages with favorable federal policy could create meaningful opportunities for tax-efficient retirement planning. Understanding both state and federal frameworks helps retirees make informed decisions about where to spend their retirement years.