After decades of contributing to Social Security, creating a retirement plan, or earning a pension, the prospect of substantial taxes in retirement can be thoroughly off-putting. Particularly disconcerting is the notion of your state also taxing your hard-earned retirement income.
However, not every state is financially harsh on retirees. While navigating federal taxes is unavoidable, certain states offer attractive tax benefits on retirement income, some even providing complete tax exemption.
Arkansas, for instance, offers retirees an exemption of up to $6,000 annually from public and private employer-sponsored pension plans and IRA distributions, provided these are received after the age of 59 ½, or due to death or disability. The state doesn’t tax Social Security income or military retirement, and imposes no estate or inheritance tax, delivering a reprieve for your heirs.
Illinois stands out as especially retiree-friendly, offering exemptions on pension income, 401(k), IRA withdrawals, Social Security benefits, and military retirement pay. However, the state does impose taxes on other investment earnings and estates and inheritances.
Iowa has recently evolved its tax laws to better accommodate retirees. From January 2023, pension, 401(k), or IRA income for residents over age 55 is no longer taxable. From January 1, 2025, the state transitioned to a flat tax system of 3.8%, forsaking their previous graduated tax system of up to 5.7%. Inheritance tax was also abolished as of 2025.
Mississippi denies state taxes on retirement plans, pension income, Social Security income, and military retirement pay. However, early distributions from retirement plans don’t qualify for exemption. Importantly, Mississippi does not impose estate or inheritance tax.
In New Hampshire, while Social Security and pension income are free from taxes, retirements accounts which qualify as interest or dividends are taxed. The state doesn’t tax earned wages and exempts most distributions, considering them as income. As of January 1, 2025, New Hampshire repealed its tax on interest and dividends. The state also does not impose estate and inheritance taxes.
Pennsylvania offers retirees exemption from state taxes on Social Security, pension income, and retirement plan distributions, and has a flat income tax of 3.07% on earned wages.
It’s important to consider these tax scenarios when planning retirement location, as these nine states do not enforce state income tax on any retirement income: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, Tennessee, and New Hampshire. Keep in mind that while these states do not impose state income tax, some may substitute this with other tax types like property or sales tax.
Despite age not influencing tax exemption on pensions within the United States, viable strategies exist to help alleviate taxes during retirement. Planning withdrawals strategically, delaying Social Security benefits till 70, donating to charities, and living in a tax-friendly state can significantly reduce taxes. Alongside these, incorporating relevant medical deductions also helps.
State taxes on retirement income can significantly vary. Some states provide considerable tax relaxations on Social Security, 401(k) withdrawals, IRA distributions, and pensions. Residing in one of these states, particularly those devoid of income tax altogether, lets you retain more retirement income. However, considering taxes alone while deciding your retirement location may be shortsighted. Seek professional financial advice to ensure a comprehensive retirement plan meeting your multifaceted needs.