Where May Retirees Get The Most Favorable Tax Treatment?

The holy grail for many retirees is to find a tax-free jurisdiction to spend their life savings. Income from Social Security, pensions of any kind, 401(k) and IRA distributions, interest, dividends, and capital gains are not subject to state taxation in these eight states. 

A complicated patchwork persists, however, among the remaining 43 states and DC. States seem to have a unique approach to taxation, levying taxes on some items but exempting others. Because every retiree has unique income streams, it can be difficult to determine which states tax various types of income. 

Here is a reference on taxes in each state. Please consult your state website or accountant for the most up-to-date information, as taxes are subject to change.

Eight states have no income taxes.

The easiest way for someone to avoid paying state income taxes is to relocate to one of the eight states:

  •  Alaska
  • Florida
  • Nevada
  • South Dakota
  • Tennessee
  • Texas
  • Washington 
  • Wyoming 

Your earnings won’t be subject to state income tax, so you don’t have to investigate more.

Types of Income some states don’t tax.

Earned income, Social Security, pensions of various sources, 401(k) and IRA distributions, interest, dividends, and capital gains are all examples of taxable income that can provide a challenge for retirees trying to avoid or reduce their state income tax liability. It might be challenging to research each state’s tax laws individually to see how they treat your potential retirement income sources.

Social Security

Social Security payments are fully or partially taxable in 13 states:

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

IRAs and 401(k)s

State income taxes are not deducted from 401(k) and IRA payouts in Illinois, Mississippi, and Pennsylvania. Other states’ income tax systems have different exemptions or minimums.


States, including Alabama, Illinois, Hawaii, Mississippi, New Hampshire, and Pennsylvania, don’t tax retirement funds. 

However, in some jurisdictions, like the United States government or the military, pension income may be entirely or partially exempted.

Military pensions

The pensions of military retirees are exempt from taxation in seventeen states.

Military pensions are fully taxable in these states:

  • California
  • Georgia
  • Kentucky
  • Montana
  • Rhode Island
  • Vermont
  • Virginia

Pensions from the military are subject to partial taxation in several states:

  • Arizona
  • Delaware
  • Idaho
  • Maryland
  • New Mexico
  • Oklahoma
  • Oregon
  • South Carolina
  • District of Columbia
  • West Virginia

Government Pensions

Pensions from the federal, state and municipal governments provide unique challenges for state taxation. Depending on the details, several states may provide exemptions (e.g., an in-state pension might be exempt or out-of-state not). You should contact the state in which you might be interested in more information.

Revenue from Investments

Earned income is not subject to taxation in New Hampshire, although interest and dividends are. Other states’ income taxes, to differing degrees, will also apply to this source of funds.

Exemption requirements are not uniform between states. To get a complete view of the taxation situation in a given state, you need to know how each form of income may be taxed and how standard or senior exemptions may apply. For seniors, the standard deductions in some jurisdictions can be rather substantial. In some areas, all income is disregarded up to a set threshold or under certain conditions. Other states tax every dollar that comes in. Recent legislation in Maryland, for instance, provides tax relief for couples over 65 with annual incomes of up to $150,000.

In conclusion

Determine how much the state taxes retirement income before deciding where to retire. You may do a sample return or have your accountant handle it. Don’t let yourself be caught off guard.