It’s true: These 13 states don’t tax pension income

Want to minimize your tax bill? Most people are. After all, this is money that could otherwise be invested, spent on a purchase of your choice, or simply pocketed!

Taxes can never be completely avoided, of course. For most retirees, however, they can only be limited by living out their retirement in a particular state. You see, while you’ll always be subject to federal income tax, there are 13 states that don’t tax pension income — at all.

Here is an overview of these states.

States that do not tax pension income

Don’t get too excited yet. Nine of these states don’t tax pension income simply because they don’t impose any state income tax on anyone, retired or not. These nine states are:

• Alaska
• Florida
• Nevada
• New Hampshire*
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

* Although New Hampshire does not tax its residents’ income, by the end of this year it will tax any annual interest and dividend income that exceeds $2,400. Starting next year, however, this tax will no longer apply.

And the other four? While these states tax their residents’ wages, in most cases they still exclude income from sources such as 401(k) accounts, IRAs, pensions, and Social Security benefits from state taxation:

• Illinois
• Iowa
• Mississippi
• Pennsylvania

That said, know that while Alabama and Hawaii tax 401(k) and other IRA distributions, neither tax pension income. You should also know that while most states (and the District of Columbia) do not tax Social Security income, regardless of other types of state income taxes, at least eight states some Social security pension benefits May to be subject to state income taxation. Fortunately, most of their retired residents will not owe such taxes because they do not pass reasonably generous income thresholds. States where Social Security payments are still subject to state taxation are:

• COLORADO
• Connecticut
• Minnesota
• mountain
• New Mexico
• Rhode Island
• Utah
• Vermont

Meanwhile, West Virginia is phasing out the taxation of Social Security retirement benefits. Only 65 percent of West Virginians’ Social Security earnings are subject to state taxes this year and only 35 percent next year. This phase-out will be complete for fiscal year 2026.

Something to think about, though do think about it enough

It can be complicated if you’re really interested enough in reducing your retirement tax liability to move to another state. If Social Security is your largest source of income, you may be better served in some states, but you may be better off in other states if your 401(k) accounts or IRAs will be the main source of retirement income.

Also, keep in mind that you will still be subject to federal taxes regardless of where you live. This remains the biggest part of most people’s annual income tax bill.

Image source: Getty Images.

Even if you figure out which state optimizes your tax situation, there are other considerations. Chief among them is the cost of living in a particular state. Some of the tax-friendly states listed above have proven to be particularly expensive to live in.

For example, home prices in Florida soared as hundreds of thousands of people flocked to the state in search of tax-free living. Property taxes are also rising in many Florida cities and towns, infrastructure and government spending unable to keep up with population growth and rising administrative costs. Before you make a life-changing move, make sure you squeeze all the numbers.

Also, consider the weather when you’re thinking of moving, especially if it could affect your health. Alaska can get pretty cold. Nevada can get awfully hot and dry. You’ll also want to think about the friends and family you might be leaving behind. Sometimes a little extra money isn’t always worth it.

Still, for the average retiree, moving to a more tax-friendly state could save thousands of dollars a year.