For many planning retirement, choosing a state that minimizes or eliminates taxes on key retirement income sources can be as important as selecting the right community. Whether you’re drawing from capital gains, 401(k)/IRA/TSP distributions, pension benefits, or Social Security, understanding how your state of residence treats these income streams is critical. Below is a comprehensive breakdown of states with favorable tax treatments and detailed lists to help guide your decision.
Capital Gains: 8 States with No Tax on Capital Gains
Capital gains can represent a significant portion of your retirement portfolio. For retirees who are concerned about taxes on investment earnings, the following eight states impose no state income tax—and therefore do not tax capital gains:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
- Tennessee (following the complete phase-out of its Hall tax)
These states not only help you keep more of your investment profits but also offer attractive living conditions that many retirees value.
Retirement Accounts: 13 States That Don’t Tax 401(k), IRA, and TSP Distributions
Retirement accounts are the backbone of many individuals’ retirement income. The following 13 states offer the benefit of not taxing distributions from 401(k)s, IRAs, and Thrift Savings Plans—ensuring that more of your retirement savings go toward living your best life:
- Alabama
- Alaska
- Florida
- Illinois
- Mississippi
- Nevada
- New Hampshire
- Pennsylvania
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
For many retirees, these states provide a tax-efficient way to stretch hard-earned retirement dollars.
Pension Benefits: 15 States with No (or Highly Favorable) Pension Taxation
Pensions can provide a steady income stream during retirement. In 15 states, pension benefits enjoy either full exemption or highly favorable tax treatment. The list below includes states that either do not tax pension income at all or offer full exemptions for retirees (note that in some cases, exemptions apply fully only to individuals above a certain age):
- Alabama (exemption available for seniors)
- Alaska
- Florida
- Illinois
- Mississippi
- Nevada
- New Hampshire
- Pennsylvania
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
- Kentucky (exempts pension income for taxpayers 65 and older)
- West Virginia (offers full pension exemptions for qualifying seniors)
These states help ensure that your pension income remains intact, further enhancing your financial security in retirement.
Social Security Benefits: 41 States That Don’t Tax Social Security
Social Security benefits are a lifeline for many retirees. Fortunately, 41 states provide relief by not taxing Social Security income at all. The nine states that do tax Social Security benefits are:
- Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, and West Virginia.
Thus, the 41 states that do not tax Social Security include all the remaining states. For reference, here is an alphabetized list of those 41 states:
- 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
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- Wisconsin
- Wyoming
By choosing a state from this list, retirees can rest assured that their Social Security benefits will remain largely untouched by state income taxes.
Making the Best Choice for Your Retirement
While tax policy is a major factor, it’s important to consider other quality-of-life issues, such as healthcare access, cost of living, climate, and community amenities. Many financial experts recommend consulting with a tax professional or financial advisor to understand how state tax laws interact with your personal situation.
-Nguyễn Bách Khoa-
Further Reading & Resources:
- AARP’s Best States for Retirees
- Kiplinger’s Retirement Tax Guide
- Investopedia’s Guide to State Taxes on Retirement Income
- U.S. News – Best States to Retire
Retirement planning is a complex process, and state tax policies are just one piece of the puzzle. By understanding the tax advantages available in various states, you can plan more effectively for a comfortable, financially secure retirement.
For personalized advice, consult a financial advisor or tax professional to tailor your retirement strategy to your unique needs.