You Don’t Have to Pay Taxes on Retirement Income if You Live in These 13 States. In 13 states, retirees can enjoy the benefit of not paying taxes on their retirement income. This includes distributions from 401(k)s, IRAs, and pension payouts. Additionally, in several states, Social Security payments are also tax-exempt.
Varied Approaches to Taxing Retirement Income
The taxation of retirement income varies among states due to the diverse sources from which it originates. Some states lack income tax altogether, while others provide exemptions for retirement income. Most states do not tax Social Security benefits, and some selectively tax 401(k) plans and IRA distributions while leaving pensions untaxed.
Nuances in Taxation
Understanding the nuances of retirement income taxation is crucial, as states often offer various forms of tax relief for retirees. This relief may include tax caps, income limits on exemptions, or other breaks. Given that state tax laws are subject to constant change, staying informed through the state tax commission is essential.
States with No Income Tax
Nine states stand out as not taxing any income, whether it be from paychecks or various retirement sources:
- Alaska
- Florida
- Nevada
- New Hampshire (note: taxes interest and dividends)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
No Income Tax on Retirement Income
Four states, despite having income tax, make exceptions for retirement income, including 401(k)s, IRAs, pension distributions, and Social Security benefits:
- Illinois
- Iowa (55 years or older required)
- Mississippi (retirement plan requirements must be met)
- Pennsylvania (retirement plan requirements must be met)
No Tax on Social Security
Currently, only 11 states tax Social Security benefits, and several are in the process of phasing it out. The following 39 states and the District of Columbia do not tax Social Security benefits:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
No Tax on Pensions
Fifteen states do not tax pension income, though some may offer credits or exemptions for a portion of pension income. These states include:
- Alabama (does tax 401(k) and IRA distributions)
- Alaska
- Florida
- Hawaii (does tax 401(k) and IRA distributions)
- Illinois
- Iowa
- Mississippi
- Nevada
- New Hampshire
- Pennsylvania
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Importance of Setting Up a Retirement Account
Don’t delay in establishing your retirement account. The most straightforward option is enrolling in your employer’s 401(k), especially if they match your contributions. Contributions from employees are taken from pre-taxed income, reducing taxable income for the year.
Diversify with Roth IRAs
For those without access to a 401(k) or seeking to supplement it, a Roth IRA is an excellent option. Contributing after-tax dollars allows for tax-free withdrawals in retirement. Consider diversifying your portfolio by having both a 401(k) and a Roth IRA. Leading brokerages like Charles Schwab and Fidelity, as well as robo-advisors like Wealthfront, offer Roth IRAs as part of their investment options.
Conclusion
Strategically choosing a tax-friendly state and optimizing retirement accounts can enhance financial well-being during your golden years. Explore these options, stay informed, and secure a tax-efficient retirement for a more comfortable future.
