Retirement Income Tax Strategies: 13 States Offer Complete Relief

For many Americans approaching retirement, minimizing tax obligations becomes a priority. The good news? A significant number of states have positioned themselves as tax-friendly destinations for retirees by exempting retirement income from state taxation.

Which 13 States Exclude Retirement Income From Taxation?

Nine states maintain no state income tax whatsoever, creating an automatic shelter for all retirement income types. These jurisdictions are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

In addition to these nine, four more states have implemented specific tax policies favorable to retirees: Illinois, Iowa, Mississippi, and Pennsylvania. Combined, these 13 states offer complete exemptions from state taxes on:

• Social Security retirement benefits
• 401(k) plan distributions
• IRA withdrawals
• Pension payments from any retirement vehicle

Important Considerations Before Relocating

While the full list of 13 states looks attractive, some nuances deserve attention.

Washington’s capital gains tax: Though Washington exempts retirement income, it taxes capital gains at certain thresholds. A recent ballot measure to eliminate this tax failed to gain sufficient voter support in November 2024.

Early withdrawal penalties in two states: Mississippi and Pennsylvania, despite their overall retiree-friendly policies, will tax early distributions (those taken before age 59½) from retirement accounts. This distinction matters for those accessing funds before traditional retirement age.

Beyond the 13: Partial Retirement Tax Relief in Other States

Residents of states outside this core group still have options. Many states offer partial exemptions on specific retirement income types.

Social Security protection: At least 28 additional states exclude Social Security benefits from taxation. This includes jurisdictions like Alabama, Arizona, Arkansas, California, Delaware, and others.

Additional benefits: Alabama extends protection beyond Social Security, also exempting pension income from defined benefit plans. Hawaii similarly shields certain distributions from private and pension plans when contributions originated from non-retiree sources.

Federal Tax Reality for All Retirees

Regardless of state residence, federal income taxes remain unavoidable. However, Social Security benefits receive partial federal protection based on combined income levels.

The taxation formula considers adjusted gross income, nontaxable interest, and half of annual Social Security benefits. Depending on this combined total and filing status, between zero and 85% of Social Security benefits may become subject to federal taxation:

Looking Ahead: Potential Federal Changes

Recent political developments suggest possible future shifts in federal retirement taxation. Proposed reforms include potential elimination of federal income taxes on all Social Security benefits, which could meaningfully increase take-home retirement income if enacted.

Strategic Planning for Retirement Income

Understanding which 13 states don’t tax retirement income represents just one piece of comprehensive retirement planning. Combining state selection with knowledge of federal Social Security taxation rules and strategic benefit claiming can substantially impact long-term financial security. Those nearing retirement should evaluate both their current state’s tax treatment and potential relocation benefits when modeling retirement income scenarios.