How to Maximize Your Retirement Savings: A Guide to Low-Tax States

Transitioning from a steady paycheck to retirement income represents one of life’s major financial shifts. When combined with current economic pressures like inflation and rising interest rates, many Americans find themselves stretched thin — both in preserving their retirement savings and managing their tax burden.

One strategic factor that directly impacts your financial security in retirement is choosing where you live. Your state of residence determines how much of your retirement distributions, pension income and Social Security benefits you actually keep after taxes.

Understanding Retirement Income Taxation

Before exploring tax-friendly states, it’s important to understand the basics. You’ll owe federal income tax on withdrawals from tax-deferred accounts such as traditional IRAs, 401(k)s, 403(b)s and similar retirement plans. These distributions are taxed as ordinary income in the year you withdraw them. The challenge intensifies when your state also taxes this income.

The good news? Several states have recognized the value of supporting their retired residents and have eliminated or significantly reduced taxes on retirement distributions.

States With Zero Income Tax

The simplest approach to minimizing retirement taxes is living in a state with no income tax whatsoever. This eliminates taxation on Social Security, pensions, and distributions from retirement accounts.

These eight states currently impose no state income tax:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Wyoming

Washington State deserves a special mention: while it doesn’t tax regular income, it does impose a capital gains tax on certain high-earning investors.

Important caveat: States without income tax often compensate through higher sales taxes and property taxes, so the overall tax burden requires careful calculation.

States That Exempt Retirement Income From Taxation

Beyond zero-income-tax states, several others specifically protect retirement income from taxation while maintaining an income tax system. This targeted approach can be particularly advantageous.

Illinois: Comprehensive Retirement Protections

Illinois maintains a flat 4.95% state income tax but exempts nearly all retirement income from taxation. This includes Social Security benefits, pension payments, and distributions from:

• 401(k) plans, IRAs and Roth IRAs
• U.S. retirement bonds upon redemption
• State and local government deferred compensation plans
• Government and military retirement benefits
• Railroad retirement income
• Lump sum distributions of appreciated employer securities

Mississippi: Low Taxes and Affordable Retirement Living

Mississippi’s tax landscape became even more attractive starting in 2025, with the income tax rate dropping to 4.4% (projected to fall further to 4% in 2026). The rate structure currently shows 0% on the first $10,000 of taxable income and 4.7% above that threshold.

The real advantage? Mississippi income tax doesn’t touch retirement distributions. All Social Security benefits, pensions, 401(k) withdrawals and IRA distributions remain completely untaxed for those meeting plan requirements. Combined with Mississippi’s low property taxes and moderate sales taxes, this state offers one of the most affordable retirement environments available.

Pennsylvania: Friendly Retirement Income Policy

Pennsylvania imposes a flat 3.07% personal income tax but protects retirement income entirely. The state doesn’t tax traditional retirement income sources including employer-sponsored 401(k) and pension distributions, Social Security benefits, or disability retirement payments — provided plan eligibility requirements are satisfied.

Iowa: Recent Expansion of Retirement Protections

Starting in 2023, Iowa made a significant change: residents aged 55 and older are no longer taxed on their retirement income. While the state maintains a 3.8% flat tax rate, the retirement income exclusion is comprehensive.

It covers all forms of retirement income including governmental pensions, defined benefit and contribution plans, annuities, IRAs, employer-maintained accounts and deferred compensation plans. To qualify, you must be age 55 or older on December 31 of the tax year, disabled, or a surviving spouse with an insurable interest in a qualified account holder.

Making Your Decision

Selecting where to retire involves more than just income tax rates. You must weigh state income, property and sales taxes together. For some, relocating to a state like Mississippi with favorable income tax treatment on retirement distributions could result in substantial lifetime savings. For others, remaining in their current state while optimizing federal tax strategies may prove more practical.

The key is understanding your specific situation: your income sources, withdrawal patterns from retirement accounts, Social Security timing, and total lifetime tax exposure across all tax types. Consulting with a tax professional who understands both your home state and potential retirement destinations can help ensure you’re making the most tax-efficient choice possible.