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Thirteen States Do Not Tax Income from Retirement
Several retirees will have to decide where they will spend their golden years. Taxes are essential when evaluating the cost of living in different regions, a significant stage in decision-making. Various states treat pension payouts, 401(k), and IRA distributions differently.
Here is what you need to know about how other states tax retirement income and the states where you will not be taxed.
States with no individual income tax
Distributions from 401(k) plans and IRAs are taxable income. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not tax any retirement income.
Like these eight states, New Hampshire does not impose an income tax but does tax interest and dividend payments, a mainstay of many retirement portfolios. You could avoid this tax by storing income-generating assets in a tax-advantaged plan, such as an IRA, and then withdrawing cash from the plan. New Hampshire will not tax the distribution since it qualifies as taxable income.
States without a pension income tax
Illinois, Iowa, Mississippi, and Pennsylvania do not tax retirement income, in addition to the nine states listed above that have no income tax. What you need to know about each is provided below.
Illinois
The state income tax rate in Illinois is 4.95 percent. However, all retirement income is exempt. This covers pension payouts and distributions from 401(k)s and IRAs. In addition, Social Security benefits are exempt.
Iowa
Beginning in 2023, a new law approved in 2022 exempts Iowa adults over 55 from paying taxes on their retirement income. In 2023, Iowa's state income tax rates will range from 4.4% to 6%, but subsequently, the range will reduce until a flat rate of 3.9% is introduced in 2026.
State income tax rates in Mississippi range from 0% to 5%. However, retirement income is not taxed if plan criteria are satisfied. This indicates that early payouts from retirement plans may not qualify as retirement income and may be subject to taxation and a penalty.
Pennsylvania
Pennsylvania's flat rate of personal income tax is 3.07 percent. Pennsylvania does not tax retirement income as long as plan criteria are followed. Withdrawals from retirement plans, such as IRAs, before the requisite age (59 12) may be subject to taxation.
Additional elements of pension income tax
Although the states listed above do not tax retirement income, some states have exemptions. Some states exempt military retirement pay from taxation, while others tax pension income differently than 401(k) and IRA payouts.
Some jurisdictions impose taxes on Social Security benefits, although most do not tax these payments.
Ensure you understand the state's tax implications before deciding where to retire. Retirement income tax is one issue, but sales and property taxes must also be factored in for a complete picture. Finally, you may determine that paying more outstanding taxes is beneficial if a state delivers additional benefits that more than offset the extra expense.
Bottom line
If you wish to avoid paying state taxes on your retirement income, 13 states and many others give exclusions. When relocating to a state, you must thoroughly understand its tax structure. Although minimizing your tax liability could help you have a more comfortable retirement, it is not the only consideration.
If you would like to see how this may affect your current situation. Click here
Lynch Retirement Group |
John M. Lynch, CIMA®, CPWA® |
John M. Lynch, CIMA®, CPWA® Managing Director
LRIG, Financial Advisor– RJFS, of The Lynch Retirement Investment Group, LLC.
Was named on the 2021 Forbes Best-In-State Wealth Advisor List.
John M. Lynch, CIMA®, CPWA® |
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Andrew Fentress, CFP® |
Adam Tobin, CFP®, CRPC |
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