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Key takeaways
- Illinois, Iowa, Mississippi, and Pennsylvania are the most tax-friendly states for retirees.
- Thirty-eight states do not tax Social Security income.
- Thirty-seven states do not tax most military retirement pay.
- Fifteen states exempt retirement income from state taxes.
- Nine states have no income tax at all.
After a lifetime of contributing to Social Security, building a retirement plan, or collecting a pension, you may be ready for a big tax hit when you retire. Now you’re ready to issue your final card, and your state is reaching out for some tax money, too.
Or is it? While federal taxes are unavoidable, some states are kinder than others when it comes to taxing retirement income. Others do not tax them at all.
States that do not tax retirement income
Arkansas
Getty Images/Samuel Wells
Arkansas offers retirees a break by exempting up to $6,000 annually from public and private employer-sponsored retirement plans and IRA distributions received after age 59 or due to death or disability. It also does not tax Social Security income or tax military retirement pay at all. Additionally, Arkansas has no estate or inheritance tax, so your heirs will not face additional tax burdens.
illinois
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Illinois is another retiree-friendly state. The state exempts pension income, 401(k) and IRA withdrawals, Social Security benefits, and military retirement pay from state taxes. However, Illinois taxes other investment gains and imposes estate and inheritance taxes.
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Iowa tourism travel
Iowa recently updated its tax laws to be more retirement-friendly. As of January 2023, the state no longer taxes pension, 401(k) or IRA income for residents over age 55. If you qualify, you can enjoy tax-free retirement income starting at age 55.
Two years later, on January 1, 2025, the state moved from a graduated tax system (top rate of 5.7%) to a flat tax system with a rate of 3.8%. The state will also no longer impose an inheritance tax as of 2025.
Mississippi
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Mississippi earns retirement plan distributions, pension income, Social Security income, and military retirement pay from state taxes. Early distributions from retirement plans generally do not qualify for exempt status. This state has no estate or inheritance tax either.
New Hampshire
Media photo courtesy of the New Hampshire Department of Travel and Tourism
New Hampshire does not tax Social Security or retirement income although it does tax distributions from qualified retirement accounts as interest or dividends. This state does not levy income tax on wages earned, and most distributions are considered income, so they are exempt.
Notably, New Hampshire eliminated the tax on interest and dividends effective January 1, 2025, making them more attractive to retirees. Estate and inheritance taxes are also absent in New Hampshire.
Pennsylvania
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Pennsylvania retirees benefit from reduced state taxes on Social Security, pension income, and retirement plan distributions. Additionally, Pennsylvania has a flat income tax rate of 3.07% on wages earned, one of the lowest rates in the country. Eligible retirees also have access to a property/rent tax deduction program, adding to the state’s appeal.
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Pennsylvania offers a property/rental tax rebate program for seniors.
South Carolina
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South Carolina is another state that does not tax Social Security income. As of tax year 2022, all military retirement pay is exempt from state income taxes.
For those over 65, the first $10,000 of retirement plan income is exempt from state tax, and the exemption drops to $3,000 for younger retirees. South Carolina also offers a $15,000 tax credit for those 65 and older.
Countries with no income tax
If you live and/or work in one of the following nine states, you don’t need to worry about state income taxes on any retirement income:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington (taxes only capital gains for high-income earners)
- Wyoming
These states offer an automatic tax break to retirees by not taxing any retirement income. It’s also worth noting that some of these states may continue to impose other taxes, such as property taxes or sales taxes, to make up for the shortfall in income taxes.
At what age do you stop paying taxes on your pension?
In the United States, there is no set age to stop paying taxes on your pension, as taxes are not determined by age. Most annuities will be subject to federal income tax and state income tax, depending on the state. Additionally, at age 73, you must begin taking required minimum distributions from tax-deferred accounts.
How can I reduce taxes in retirement?
There are some strategies you can incorporate to help reduce taxes in retirement. You should start by planning your withdrawals strategically. You must first withdraw from taxable accounts and then tax-deferred accounts, such as 401(k)s and IRAs. This allows tax-advantaged accounts to grow longer while keeping early taxable income low.
Keep in mind that required minimum distributions (RMDs) start at 73, so converting some traditional IRA funds to a Roth IRA beforehand can reduce your future tax burdens because Roth IRAs are not subject to RMDs.
Consider delaying Social Security benefits until age 70, because that will increase your benefits but also keep your taxes low early on. Donating to charity also reduces taxes and can be a convenient option for you. Finally, living in a tax-friendly state will reduce your taxes as will some medical deductions.
How is Social Security taxed in retirement?
Social Security may be taxed in retirement depending on your income. If your combined income, which includes Social Security benefits, non-taxable interest, and adjusted gross income, is above a certain threshold, you will be subject to income tax. For solo filers, if your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxed. If it’s more than $34,000, up to 85% of your benefits may be taxed.
Bottom line
State taxes on retirement income vary widely, but many states make life easier for retirees by offering significant tax breaks on Social Security, 401(k) withdrawals, IRA distributions, and annuities.
If you live in one of these states — or better yet, one of the nine states with no income tax — you’ll keep more of your hard-earned retirement income. While tax laws can change, it is important to take these factors into consideration when deciding where to retire. But there’s more to consider than just taxes when you’re deciding where to retire, so consider talking to a financial advisor to find the right plan for you.
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