These States Don't Tax Retirement Income -- Is Yours One of Them?

How retiree-friendly is your state?

One of the largest expenses for many retirees is taxes. Depending on how you saved during your working years, most or all of your income in retirement could be taxable at the federal level. However, savvy savers could reduce or eliminate their state tax liability by understanding how different states tax retirement income.

Zero income tax states

The easiest place to start in our breakdown is with the states that don't charge income tax at all. Residents in these states need not worry about paying taxes on post-retirement income, or any income at all for that matter.

There are eight states that don't charge any income taxes at all. They are:

1. Alaska
2. Florida
3. Nevada
4. South Dakota
5. Tennessee
6. Texas
7. Washington
8. Wyoming

While New Hampshire doesn't charge an income tax, it does tax dividends and interest, which are often part of a retiree's portfolio.

Retirement income can come from a variety of sources, including Social Security payments, pension payments, qualified plan withdrawals, annuity payments, military retirement pay, and more. How each of these is taxed can vary from state to state, but as a general rule, retirees in the states listed above will not be subjected to taxes on their income.

States that tax Social Security

Every month, nearly 67 million Americans receive Social Security benefits -- the vast majority of them retirees. The taxes levied on these benefits can be even harder to calculate than on traditional income, which is why many states have done away with taxing Social Security payments altogether.

Currently, only 11 states tax a retiree's Social Security check. They are:

1. Colorado
2. Connecticut
3. Kansas
4. Minnesota
5. Missouri
6. Montana
7. Nebraska
8. New Mexico
9. Rhode Island
10. Utah
11. Vermont

How these states tax Social Security payments ranges widely. Some states, including Minnesota and Utah, tax a portion of Social Security benefits using the same combined income approach as the federal government. Many other of these states offer up to a 100% deduction of benefits from taxable income according to a taxpayers age, income or both.

Qualified distribution exemptions

Another common cash flow for retirees is withdrawing retirement savings from qualified plans. While the federal government treats any withdrawal from a pre-tax 401(k) or Individual Retirement Account as taxable income, not every state follows the same rules.

In addition to the eight states without income taxes, another three offer exemptions for pension payments and 401(k) and IRA distributions. They are

1. Illinois
2. Mississippi
3. Pennsylvania

Additionally, while Alabama and Hawaii tax retirees on 401(k) and IRA distributions, both offer at least partial exemptions for pension payments.

Your tax liability in retirement depends on many things, including income sources and what state you live in. However, certain states offer favorable treatment for retirees receiving Social Security benefits and pension payments or withdrawing from retirement savings accounts. Each state taxes retirement income differently, so consult with your tax advisor for advice specific to your situation.