Retirement Tax Havens: States With No Income Tax on Pensions & Withdrawals

Most retirement savers tend to focus on how much money they’re putting away for retirement and how much their investments are earning. And these are certainly important factors when it comes to planning for a financially comfortable retirement.

But there’s another critical, yet often overlooked, factor that’s just as important: taxes.

Different states tax retirement income differently, so where you decide to live during your golden years could have a big impact on how long your retirement nest egg lasts.

Learn More: 5 Tax Hacks Every Investor Should Know

State Taxation of Individual Income

There are currently seven states in which individual income is not subject to tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In two other states — New Hampshire and Tennessee — only dividends and interest are subject to state taxes.

The tax treatment of retirement income varies considerably in all the other states. For example, 401k, IRA and pension income is exempt from state tax in Illinois, Mississippi and Pennsylvania. In Alabama and Hawaii, pension income is exempt from state tax but income from 401ks and IRAs isn’t. And a number of states exempt or provide a credit for a portion of pension income. These states include:

• Alabama
• Arkansas
• Colorado
• Delaware
• Georgia
• Hawaii
• Iowa
• Kentucky
• Louisiana
• Maine
• Maryland
• Michigan
• Missouri
• Montana
• New Jersey
• New Mexico
• New York
• Ohio
• Oklahoma
• Oregon
• Rhode Island
• South Carolina
• Utah
• Virginia
• Wisconsin

The state income tax rate is another important consideration. In Arizona, New Mexico, North Dakota and Ohio, for example, marginal income tax rates are below 5%. Colorado, Illinois, Indiana, Michigan and Pennsylvania, meanwhile, each have flat tax rates below 5%. Conversely, the highest state income tax rates are in California (13.3%), Hawaii (11%), Oregon (9.9%), Minnesota (9.85%), Iowa (8.98%), New Jersey (8.97%), Vermont (8.95%) the District of Columbia (8.95%), New York (8.82%) and Wisconsin (7.65%).

State Taxation of Pension and Social Security Income

Meanwhile, 13 states and the District of Columbia fully tax pension income:

• Arizona
• California
• Connecticut
• Idaho
• Indiana
• Kansas
• Massachusetts
• Minnesota
• Nebraska
• North Carolina
• North Dakota
• Vermont
• West Virginia

And 13 states also tax Social Security income

• Colorado
• Connecticut
• Kansas
• Minnesota
• Missouri
• Montana
• Nebraska
• New Mexico
• North Dakota
• Rhode Island
• Utah
• Vermont
• West Virginia

Some of these states that tax Social Security income provide tax breaks for low-income couples and individuals. Also, West Virginia will start phasing out state taxation of Social Security benefits starting in 2021.

Other Taxes to Consider

State income taxes aren’t the only taxes that can affect your income in retirement. State sales and local sales and use taxes can also take a bite out of your retirement finances. All states and the District of Columbia impose these taxes except Alaska, Delaware, Montana, New Hampshire and Oregon.

The highest state sales taxes are in California (7.25%), Indiana, Mississippi, Rhode Island and Tennessee (7.0% in each). On the flip side, the lowest state sales taxes are in Colorado (2.9%), Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota and Wyoming (3.0% in each). Local sales and use taxes, meanwhile, are assessed by cities, counties and special taxing jurisdictions — these vary widely all across the country.

State and local property taxes are another important factor to consider. The biggest property tax paid by most retirees is the annual tax paid on the value of their home. However, some states and local jurisdictions offer property tax exemptions, credits and abatements to retirees, such as an exemption from paying the school tax portion of their property taxes.

Next Steps for You

Retirement tax planning can be complicated and the details vary from one individual or couple to the next. So be sure to talk to your tax advisor and personal financial planner for guidance in your specific situation.

Managing your tax situation is a year-round — and life-long — endeavor. Personal Capital’s financial advisors provide insights that every investor should know in the free, downloadable guide. When you get the guide, you also unlock access to Personal Capital’s online financial tools at no cost.