Tax Treatment of Retirement Income: A State-by-State Breakdown You Need to Know

Where you spend your golden years matters more than you might think—especially when it comes to taxes. The location you choose for retirement can significantly impact your overall tax liability, making it crucial to understand how different states treat various types of retirement income.

Understanding the Tax Landscape Across America

The retirement income tax environment varies dramatically across the United States. While some states have zero income tax, others impose substantial levies on Social Security, pensions, and investment accounts. This geographic tax arbitrage has become an increasingly important factor in retirement planning decisions.

States with the Most Favorable Tax Treatment

Nine states have eliminated state income tax entirely: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. These jurisdictions won’t tax Social Security, pensions, 401(k) withdrawals, IRAs, or military retirement income. For retirees seeking maximum tax efficiency, these destinations represent optimal choices.

An additional tier of states offers significant but not complete tax advantages. Alabama, Hawaii, Illinois, Mississippi, and Pennsylvania won’t tax pension income or military retirement benefits, though they handle 401(k)s and IRAs differently. States like New Hampshire provide unique arrangements—taxing only certain retirement account types while exempting others.

The Social Security Question

Nearly 40 states have chosen not to tax Social Security benefits, creating a meaningful advantage for retirees who depend on these payments. However, some states including Colorado, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, New Mexico, Utah, and West Virginia do tax Social Security income. This distinction can translate to thousands of dollars in annual tax savings.

New York’s Approach: What Retirees Should Know About Social Security Taxation

New York does not tax Social Security benefits, making it more competitive than commonly perceived for certain retirees. However, New York does tax other retirement income sources and has moderate to high income tax rates on earned income and distributions from 401(k)s and IRAs. This means while Social Security recipients enjoy protection, those relying on pension distributions or investment accounts face higher state tax burdens.

Military and Government Retirement Benefits

A substantial majority of states exclude military retirement income from taxation. However, the treatment of federal employee pensions (Thrift Savings Plan distributions) varies considerably. States like Illinois, Mississippi, New Hampshire, Pennsylvania, and Wyoming exempt TSP distributions, while others tax them as regular income.

Pension Income: The Forgotten Tax Factor

Pension tax treatment creates another important distinction. Roughly half of U.S. states exempt pension income entirely, while others apply limited exemptions or full taxation. This becomes especially relevant for those with traditional defined-benefit pensions—a declining but still significant portion of the retired population.

Planning Your Retirement Location with Taxes in Mind

The tax treatment of retirement income should be one factor among several in choosing a retirement destination. While a state with zero income tax holds obvious appeal, factors like cost of living, healthcare quality, climate, and proximity to family matter equally. A state with higher income taxes but dramatically lower housing and healthcare costs might ultimately prove more economical.

For those significantly reliant on retirement accounts, comparing 401(k) and IRA treatment across potential retirement states can reveal surprising advantages. Some states that tax Social Security may exempt or favorably treat qualified retirement distributions, creating a complex calculus worth exploring with a tax professional before making your move.