All the States That Don’t Tax Retirement Distributions
Written by
Yaël Bizouati-Kennedy
Edited by
Amber Barkley
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The transition to retirement — going from a steady paycheck to living on a fixed income — can be difficult to navigate. In addition, with inflation and soaring rates, many Americans have been struggling to keep the pace with their retirement savings, while some have halted them altogether.
Against this backdrop, one factor that can help is which state you live in, as this will affect how much of your retirement distributions you will keep.
Indeed, as FINRA explains, you must pay income tax on your pension and on withdrawals from any tax-deferred investments — such as traditional IRAs, 401(k)s, 403(b)s and similar retirement plans and tax-deferred annuities — in the year you take the money. And as H&R Block notes, your withdrawals are taxed as ordinary income.
Luckily, some states don’t have income tax, which in turn translates into no taxes on retirement distributions, and some states exempt retirement income from taxation.
States With No Income Taxes
These include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming.
Washington has income tax, but it only applies to capital gains income of high earners, according to the Tax Foundation. Similarly, New Hampshire taxes only interest and dividend income.
States With No Taxation on Retirement Income
The following states do not tax retirement distributions.
Illinois
The state has a flat state income tax of 4.95% and exempts from taxation nearly all retirement income, including Social Security, according to the Retirement Group.
And according to the Illinois Department of Revenue, this includes retirement distributions received from:
- Qualified employee benefit plans, including 401(k) plans, IRAs and Roth IRAs
- The redemption of U.S. retirement bonds
- State and local government deferred compensation plans
- Government retirement or government disability plans, including military plans
- Railroad retirement income
- Retirement payments to retired partners
- Lump sum distributions of appreciated employer securities
- The federally taxed portion of Social Security benefits
Mississippi
Mississippi has a flat 5% income tax, according to the Tax Foundation.
However, as H&R Block notes, Mississippi exempts all forms of retirement income from taxation and has low property taxes and moderate sales taxes, making it an ideal place to retire.
Pennsylvania
Pennsylvania’s personal income tax is imposed annually on individuals at a flat rate of 3.07%, according to the Pennsylvania Department of Revenue.
Thanks!
Pennsylvania does not tax retirement income from commonly recognized retirement plans that were sponsored by your employer, old age benefits or disability retirement, according to TaxSlayer.
Iowa
Thanks to a recent change, Iowa excludes retirement income from Iowa taxable income for eligible taxpayers for tax years beginning on or after Jan. 1, 2023.
The retirement income exclusion covers “governmental or other pension or retirement plan[s] including defined benefit or defined contribution plans, annuities, individual retirement accounts, plans maintained or contributed to by an employer, or maintained or contributed to by a self-employed person as an employer, and deferred compensation plans or any earnings attributable to the deferred compensation plans,” according to the Iowa Department of Revenue.
To qualify for the retirement income exclusion, the Department explains on its website that the taxpayer must be: 55 years of age or older on Dec. 31 of the tax year, or disabled, or a surviving spouse or a survivor having an insurable interest in an individual who has qualified for the exclusion in the tax year on the basis of age or disability.
New Hampshire
New Hampshire is in a category of its own. As AARP explains, it also does not have income tax, so it doesn’t tax retirement distributions.
However, the state taxes interest and dividends, which many retirees depend on for retirement income.
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