Ben Franklin once said that “nothing is certain except death and taxes.” But for retirees in part of the U.S., his observation doesn’t hold up — at least with respect to income taxes at the state level.
The major sources of income for many retirees include Social Security, 401(k) plans, and Individual Retirement Accounts (IRAs). In most states, at least part of this income is taxed. However, here are 12 states that don’t tax these types of retirement income.
States with no income tax at all
Let’s start with the states that don’t tax retirement income or any other type of income. Nine states have no income tax at all:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Social Security benefits and distributions from 401(k) plans and IRAs are considered income. Therefore, if you’re a resident of any of these states, you won’t have to pay state income taxes on these sources of retirement income. If you receive distributions from an employer pension plan, it’s the same story.
States that exempt retirement income
The remaining 41 states in the U.S. do have income taxes. However, three of them exempt retirement income (including Social Security benefits and distributions from 401(k) plans, IRAs, and pension plans) from being taxed:
- Illinois
- Mississippi
- Pennsylvania
There are a couple of things to know, though. Mississippi does tax pension income for early retirement before age 59 1/2. Pennsylvania taxes pension income for residents who retire before age 60.
Also, all three of these states will tax any income that you make outside of retirement accounts. For example, if you receive dividends or sell stocks that aren’t held in an IRA or 401(k) plan, be prepared to pay taxes.
The rest
The rest of the U.S. states tax at least some types of retirement income. Thirty-eight states don’t tax Social Security benefits. There are also some other exceptions.
For example, Alabama and Hawaii tax distributions from 401(k) plans and IRAs. However, the two states don’t tax retirement income from pension plans or Social Security.
Thirty-four states don’t tax military retirement income. These include all 12 states on our list plus the following:
- Alabama
- Arizona
- Arkansas
- Connecticut
- Hawaii
- Indiana
- Iowa
- Kansas
- Louisiana
- Maine
- Massachusetts
- Michigan
- Missouri
- Nebraska
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Utah
- West Virginia
- Wisconsin
Some bad news
Regardless of where you live during your retirement years, you’ll probably have to pay federal taxes. The Internal Revenue Service (IRS) requires taxes to be paid on a portion of Social Security benefits depending on how you file (individual, married with a joint return, or married with separate returns) and your amount of income.
Uncle Sam will also tax your pension, 401(k), and IRA income in many cases. The exceptions are Roth 401(k) plans and Roth IRAs. With these types of retirement accounts, you pay taxes on your contributions but your money then grows tax-free.
Ultimately, Ben Franklin will probably always be proven right about the certainty of taxes, even during retirement. However, there are ways — including the use of Roth accounts and living in a retiree-friendly state — to keep more of your hard-earned money.
— Keith Speights
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Source: The Motley Fool