It’s true: These 37 states tax some pension income

Want to maximize your retirement income? Start with the lowest fruit. That means living in a state that doesn’t tax the daylights out of its retired residents. Indeed, some investors are surprised to learn that while several states allow their retirees to live relatively tax-free lives, others do not. A handful of states can even be financially unfriendly to people past their working years.

With that as background, here’s a list of states that tax at least a portion of retirement income.

It states that tax withdrawals from your retirement account

For the purpose of compiling this list, please know that Social Security income is not taken into account. Most states don’t tax Social Security income anyway, and for most of the few that do, the tax is modest.

Pension income is also not taken into account, although in most cases states that impose income tax on retirees’ pension income also tax the pension income, at least to some extent.

That leaves withdrawals from 401(k) accounts and individual retirement accounts, which for most investors will likely be the largest source of retirement income. That’s why you need to know where a particular state is when it comes to taxing that money before you retire there.

All 27 states below, plus the District of Columbia, currently treat IRA and 401(k) withdrawals as ordinary taxable income, even if you’ve already reached full retirement age and are officially retired:

• Arizona
• Arkansas
• California
• COLORADO
• Hawaii
• Idaho
• Indian
• Kansas
• Kentucky
• Louisiana
• Tomorrow
• Maryland
• Massachusetts
• Minnesota
• Missouri
• mountain
• Nebraska
• new york
• North Carolina
• North Dakota
• Ohio
• Oregon
• Utah
• Vermont
• virgin
• West Virginia
• Wisconsin

This does not necessarily mean that you will pay much (if any) income tax on this income. You’ll still be able to take the typical deductions when you file your taxes, lowering your taxable income. Like earners during their working years, if your total adjusted gross income doesn’t exceed certain levels even after withdrawals, you could avoid a hefty state income tax bill.

This is an unlikely scenario for most investors, however. If you live in one of the 27 states listed above or the District of Columbia, you will most likely pay at least something to the state each year.

What about the others? The following 10 states at least partial tax withdrawals from retirement savings accounts, but offer different levels of tax relief:

• Alabama
• Connecticut
• Delaware
• Georgia
• Michigan
• New Jersey
• New Mexico
• Oklahoma
• Rhode Island
• South Carolina

Exclusions, deductions, and exemptions can vary quite a bit from one of these states to another. For example, in New Jersey, whether or not contributions to a retirement account were mandatory or elective can affect the eventual taxation of withdrawals. In Rhode Island, although distributions from self-funded and self-directed accounts, such as contributory IRAs, are fully taxable, withdrawals from 401(k) accounts may be only partially taxable if you’ve also met certain age requirements and don’t exceed certain incomes. thresholds. Be sure to check state-specific rules if you plan to retire in one of the states listed above.

Just one part of a much bigger financial plan, but an important part

It’s something to think about, sure, but state taxes aren’t the only thing future retirees should consider before making such an important decision. A lower cost of living could offset a higher tax burden. Sometimes living in a place you love is worth the higher taxes. Also, let’s not forget that compared to the federal income taxes you’ll owe regardless of where you live out your golden years, state taxes will usually be significantly lower. Your medical bills could easily be higher than your state tax bill, which is another issue to think about.

However, with most state income tax rates ranging from 4% to 13%, avoiding these income taxes can save you hundreds, if not thousands of dollars a year. For some retirees, it’s absolutely worth the move, especially if you’re hoping to live in a place that fits your retirement style.