13 States Where Retirees Don't Face State Income Taxes on Retirement Benefits

Understanding Retirement-Friendly Tax Jurisdictions

For many Americans approaching or already in retirement, location decisions carry significant financial implications. A strategic approach to choosing where to retire can substantially impact how much of your income you actually keep. Fortunately, numerous states have implemented policies that are favorable to retirees, and thirteen states do not tax retirement income at all.

These thirteen states offer comprehensive exemptions from state income taxation on retirement benefits:

States with No State Income Tax Overall: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming represent the largest category. These nine jurisdictions don’t impose state income taxes on any income source, including retirement funds.

States with Targeted Retirement-Friendly Policies: Illinois, Iowa, Mississippi, and Pennsylvania have specifically structured their tax codes to protect retirement income, even though they maintain state income tax systems for other income types.

What “No Tax on Retirement Income” Actually Means

When states do not tax retirement income, this exemption typically covers multiple income streams:

• Social Security benefits receive complete protection from state taxation
• 401(k) plan withdrawals are excluded from taxable income calculations
• Individual Retirement Account (IRA) distributions remain untaxed at the state level
• Pension benefits, whether from defined benefit or defined contribution plans, escape state income taxes

This comprehensive approach distinguishes these thirteen states do not tax retirement income from states that only provide partial exemptions.

Important Considerations and Exceptions

While the protection is substantial, retirees should understand important nuances:

The Washington Capital Gains Factor: Washington state, despite not taxing traditional retirement income, implemented a capital gains tax. A recent ballot initiative to eliminate this tax failed to gain sufficient support in the November 2024 elections.

Early Withdrawal Penalties: Mississippi and Pennsylvania, while protecting qualified retirement distributions, do tax early withdrawals from retirement accounts prior to reaching age 59½. This distinction matters for those considering early retirement.

Partial Protections in Other States

Beyond the thirteen states where retirement income avoids taxation entirely, an additional twenty-seven states provide partial relief. Many exempt Social Security benefits specifically, while others offer limited pension protections. For instance, Alabama extends benefits by exempting pension income from defined benefit plans, while Hawaii excludes distributions funded by employer contributions rather than employee deferrals.

The Federal Tax Reality

Despite state-level relief, the federal government maintains taxation authority over most retirement income. Social Security benefits face federal taxation based on a combined income threshold:

• Individual filers with combined income below $25,000 owe no federal taxes on benefits
• Income between $25,000-$34,000 makes up to 50% of benefits taxable
• Income exceeding $34,000 can result in up to 85% of benefits facing taxation

For married couples filing jointly, thresholds begin at $32,000 and escalate to $44,000, with similar taxation percentages applied.

Future Considerations

Recent policy proposals suggest potential changes to the federal landscape. Political discussions have included elimination of federal income taxes on all Social Security retirement benefits, which could provide additional relief to retirees regardless of residence.

Strategic Retirement Planning

Understanding which states do not tax retirement income represents only one component of comprehensive retirement planning. When combined with careful Social Security claiming strategies and investment positioning, this knowledge can meaningfully extend retirement resources. Consulting with tax professionals about personalized strategies remains essential for optimizing retirement income security.