If given the choice, would you rather not pay taxes? That’s not a real choice, of course. No matter where you live or what level of income you’re earning, you are taxed…even if it’s just sales tax or property tax.
In a handful of states, however, retirees’ tax burden is eased simply because those states don’t tax retirement income. This could mean thousands of dollars’ worth of annual savings — maybe more — if you live in one of these states or are willing to move to one. And depending on how your retirement income is produced, several other states could also prove tax-friendly to your personal situation.
Here’s a look at the nitty-gritty that may end up inspiring you to move.
Nine states with no income tax
There are actually two subgroups among the 13 states that don’t tax retirement income. The first of these groups is the nine states that don’t impose tax on retirement income just because they don’t impose income tax on anyone, retired or not. Instead, these states are able to generate revenue from industries like tourism or the mining of natural resources. These states are:
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Alaska
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Florida
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Nevada
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New Hampshire*
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South Dakota
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Tennessee
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Texas
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Washington
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Wyoming
*While New Hampshire doesn’t tax workers’ wages, note that it will tax interest and dividend payments in excess of $2,400 per year as income through 2024. Beginning in 2025, however, this tax will no longer be imposed.
To be clear, in all these nine states, retirement income is defined as distributions from 401(k) accounts and IRAs, as well as pension income. Of course, if you choose to continue earning work-based income during your retirement in these states, that income isn’t taxed by the state either (although it is still subject to federal taxes).
Four states that don’t tax retirement income
In addition to the nine states that simply don’t impose any income tax on anyone, four more states don’t tax retirement income from 401(k) accounts, IRAs, and pensions, even though they do still tax ordinary work-based wages. These states are:
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Illinois
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Iowa
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Mississippi
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Pennsylvania
It’s worth noting that in all four of these states, retirees still need to meet certain criteria in order to escape state-level taxation. Those bars aren’t set particularly high, though. In all four cases, you’ll simply need to be of a normal retirement age…although this age can be slightly different for each state. Check with each state’s tax authority for these age-related details.
Other state taxation considerations for retirees
Retirement accounts and pensions are, of course, only part of most people’s retirement income. What about Social Security?
That can be a different story, albeit mostly for the better. That’s because most states don’t charge any tax on Social Security income either.
The remaining states, which do tax at least a portion of Social Security payments, are:
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Colorado
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Connecticut
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Kansas
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Minnesota
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Montana
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New Mexico
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Rhode Island
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Utah
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Vermont
Do note, however, that several of these states plan to eventually end taxation of Social Security benefits. If you’re not retired yet, don’t rule out the possibility of moving to one of these states in the future if you’d like to minimize your tax liability.
But what if the bulk of your retirement income comes from a traditional pension plan, such as a government pension? It’s mostly bad news on that front. Most states will still tax at least some of this pension income as income simply because it’s…well, income.
However, there are still 17 states that don’t charge any tax on payments from pension plans. These states are:
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Alabama
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Alaska
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Florida
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Hawaii
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Illinois
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Iowa
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Mississippi
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Nevada
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New Hampshire
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Pennsylvania
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Rhode Island
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South Dakota
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Tennessee
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Texas
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Vermont
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Washington
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Wyoming
Of course, in nine of these 17 cases, there’s no taxation of pension payments since there are no state income taxes to pay in the first place.
Oh, and if you’re collecting or planning to collect military retirement pay, know that even most states that charge ordinary income tax still don’t tax this particular income. Of the 16 that do tax military retirement pay, eleven of them only tax a portion of these benefits. The five remaining states, which fully tax your military retirement income, are California, Montana, Rhode Island, Utah, and Vermont.
Something to think about
Just remember that while several states offer some sort of tax relief to retirees, everyone’s top tax liability remains federal taxes. You’re not going to escape these no matter what state you live in, although you will receive a modest federal tax break on a portion of any Social Security retirement income you may be due. Also, keep in mind that while your total tax bill may be cheaper in certain states, the cost of living in those locales could be higher than where you’re living and paying more taxes now. Just be sure to crunch all the numbers if you’re mulling the idea.
Still, every bit helps. If you can save a few thousand bucks per year just by living somewhere that can offer a high quality of life in retirement, a move is certainly something worth considering.
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It’s True: These 13 States Don’t Tax Retirement Income was originally published by The Motley Fool
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