Which States Offer Tax-Free Retirement Income? A Guide to Strategic Relocation

Making the leap from regular employment to retirement represents a significant financial transition. Coupled with inflationary pressures and rising interest rates, many American retirees face mounting concerns about preserving their hard-earned retirement savings while managing tax obligations.

A strategic consideration that often goes overlooked is the role your state of residence plays in determining how much retirement income you actually keep. Understanding state tax treatment of pensions, Social Security benefits, and retirement account distributions — whether from IRAs, 401(k)s, or similar vehicles — can translate into substantial annual savings.

The Tax Landscape Across America

The baseline principle is straightforward: retirement distributions and pension income are typically taxed as ordinary income at the federal level. However, state tax treatment varies dramatically. Several states have eliminated income tax entirely, while others have carved out specific exemptions for retirement income.

States with zero income tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Washington presents a unique middle ground — it imposes no traditional income tax but does tax capital gains for high-income residents. It’s worth noting that states without income taxes often compensate through elevated sales and property tax rates.

States That Exempt Retirement Income From Taxation

Beyond the no-income-tax jurisdictions lies another category: states maintaining an income tax structure while exempting retirement distributions from taxation.

Mississippi: A Low-Tax Retirement Haven

Mississippi’s approach demonstrates compelling fiscal advantage. With an income tax rate of 4.4% as of 2025 — scheduled to decline further to 4% in 2026 — Mississippi nevertheless excludes retirement income from taxation entirely. Social Security benefits, pension payments, and distributions from 401(k)s and IRAs face no state tax burden, provided plan requirements are satisfied. This exemption extends across all forms of retirement income. Combined with comparatively low property taxes and moderate sales tax structures, Mississippi emerges as a particularly attractive destination for cost-conscious retirees.

Illinois: Broad Retirement Income Protection

Illinois maintains a 4.95% flat state income tax rate yet provides nearly comprehensive retirement income exemptions. Under Illinois Department of Revenue guidelines, excluded retirement income encompasses:

• Distributions from qualified employee benefit plans, including 401(k)s, IRAs, and Roth IRAs
• U.S. retirement bond redemptions
• State and local government deferred compensation plans
• Government retirement programs and disability plans, including military pensions
• Railroad retirement payments
• Lump sum distributions of appreciated employer securities
• The taxable portion of Social Security benefits

This expansive approach shields retirees from state taxation on substantially all retirement income sources.

Pennsylvania: Retiree-Friendly Tax Policy

Pennsylvania’s personal income tax sits at a flat 3.07% rate. Yet Pennsylvania stands out for its blanket exemption of retirement income from state taxation. The state does not tax distributions from traditional employer-sponsored retirement plans, Social Security income, pensions, or old age and disability benefits — provided recipients satisfy applicable plan requirements.

Iowa: Age-Based Retirement Income Exclusion

Iowa’s approach incorporates an age threshold. Beginning with tax year 2023, Iowa excluded retirement income from taxation for eligible residents, offering particular benefit to those aged 55 and older. Though Iowa maintains a 3.8% flat tax rate, qualified retirees escape taxation on diverse retirement income sources, including pension and retirement plan distributions, individual retirement accounts, annuities, and deferred compensation plan earnings.

To qualify, taxpayers must be at least 55 years old on December 31 of the tax year, disabled, or a surviving spouse with an insurable interest in a qualifying individual. The ms income tax structure, by comparison, offers clearer upfront advantages for retirees seeking immediate tax relief on retirement distributions.

Strategic Takeaway

For retirees navigating complex tax situations, strategic state selection represents an often-underutilized avenue for income preservation. Whether choosing among zero-income-tax states or those specifically exempting retirement distributions, the difference across a decades-long retirement can prove substantial. Consulting with a tax professional familiar with your specific retirement account types and income sources remains essential for optimizing your post-work financial strategy.