When planning for a comfortable retirement, it’s crucial to consider the tax implications of your chosen location. States in the U.S. have varied approaches to taxing retirement income.
While some states don’t impose taxes on any retirement income, others might tax IRA and 401(k) distributions, pension payouts, and even Social Security benefits as ordinary income. However, income taxes are just one piece of the puzzle. Despite having low or no income taxes, some states might have high property, sales, and other taxes.
Federal vs. State Taxation on Retirement Income
On a federal level, most retirement incomes, including Social Security benefits, pension payments, and distributions from IRA and 401(k) plans, are taxable. However, distributions from Roth IRA and 401(k) plans are exceptions. Taxes on Roth contributions are paid upfront, allowing for tax-free withdrawals after five years, provided you’re over 59 1/2 years old.
State taxation is more intricate. Some states have no income tax, meaning all forms of income, including retirement income, are exempt from state tax. Most states, however, have specific rules regarding the taxation of Social Security benefits, retirement account distributions, and pensions.
States with Zero Retirement Income Tax
For retirees seeking a tax-friendly environment, certain states stand out:
- Alaska – No state income tax
- Florida – No state income tax
- Illinois – Exempts all retirement income, including Social Security, pension, IRA, and 401(k)
- Mississippi – Exempts all retirement income, including Social Security, pension, IRA, and 401(k)
- Nevada – No state income tax
- Pennsylvania – Exempts all retirement income, including Social Security, pension, IRA, and 401(k)
- South Dakota – No state income tax
- Tennessee – No state income tax
- Texas – No state income tax
- Washington – No state income tax
- Wyoming – No state income tax
In addition to the above, New Hampshire doesn’t tax wages, salaries, retirement account withdrawals, or pension payments. However, it does tax dividends and interest, which might affect retirees with non-retirement assets.
Other Tax-Friendly States for Retirees
While the above states offer complete exemptions on retirement income, other states provide significant tax breaks for retirees. For instance, Georgia doesn’t tax Social Security benefits. It provides a deduction of up to $65,000 per person on other retirement incomes. However, Pennsylvania exempts all Social Security benefits, IRA, and 401(k) income and doesn’t tax pension payments for those over 60.
It’s essential to note that state tax laws evolve. For example, New Hampshire’s 5% tax on dividends and interest will be phased out by January 2027.
Final Thoughts
Choosing a retirement destination involves more than just tax considerations. While eleven states don’t tax retirement income, other factors, such as property and sales taxes, can impact your overall financial well-being. Before moving, consult a financial advisor to ensure you make the best decision for your unique situation. After all, retirement should be about relaxation and enjoyment, not financial stress.