How much money will you need to live comfortably in retirement? It depends in part on how much of your income will be taxed. And that amount depends on where you live.
You probably won't be able to reside in the U.S. and escape paying federal taxes. However, it's possible to avoid paying state taxes during your retirement years. Here are 13 states that won't tax your Social Security, IRA, or 401(k) retirement income.
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States with no income taxes at all
Most states levy at least some tax on income, but there are a few exceptions. Nine states currently have no income tax at all. Here they are, listed in alphabetical order:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
There is a catch with one of these states, though. New Hampshire doesn't have an income tax, but it does tax both interest and dividends. This is especially important to retirees who rely on income from interest and dividends that are outside of retirement accounts. The good news is that New Hampshire is phasing out these taxes over the next three years.
States that don't tax Social Security, IRA, or 401(k) distributions
Even if you live in one of the 41 states that do have income taxes, you still might be able to avoid paying state income taxes during retirement. There are 30 other states that don't tax Social Security income. Four of these states don't tax IRA or 401(k) distributions, either. They are:
- Illinois
- Iowa
- Mississippi
- Pennsylvania
What about pension distributions?
Many retirees can also count on income from pensions. How do the different states tax pension distributions?
You obviously won't have to pay taxes on pension distributions in the nine states with no income taxes. The four states on our list that don't tax Social Security, IRA, or 401(k) distributions don't tax pension distributions, either.
There are also a couple of states that do tax some types of retirement income but don't tax pension distributions. These states are:
- Alabama (traditional pension plans and Railroad Retirement plans are tax-exempt)
- Hawaii
Military retirement pay is a type of pension distribution that's treated differently by some states. Currently, 21 states with income taxes don't tax military retirement pay:
- Alabama
- Arkansas
- Connecticut
- Hawaii
- Illinois
- Iowa
- Kansas
- Louisiana
- Maine
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- New Jersey
- New York
- North Dakota
- Ohio
- Pennsylvania
- West Virginia
- Wisconsin
Don't forget the other costs
Keep in mind that we've been talking only about state income taxes so far. States generate revenue in other ways that can impact retirees in a big way.
Property taxes are higher in some of the states with no income taxes than they are in other parts of the U.S. Many states also charge sales taxes on products and services. These sales taxes can also be applicable at the local level.
In addition, there are other costs that retirees can incur that vary greatly depending on where they live. Housing is much more expensive in some states. Automobile and homeowners insurance costs can also be much higher in certain states.
The bottom line is that you shouldn't choose where to retire based solely on how much your retirement income will be taxed. Other factors can also make a big difference in the amount you'll need to retire comfortably.
