States Not Taxing Retirement Income as of 2022

Moving to a state with no income tax on retirement benefits is a great way to keep more money in your pocket. This guide covers the states not taxing retirement income as of 2022.
Older couple looking at each other happily about states not taxing retirement income

In September 2021, Jessica Dickler of CNBC reported that 36% of Americans believe they won’t have enough money to retire. Even if you’ve been saving diligently, state income taxes can take a big bite out of your retirement benefits—but only if you live in a state that taxes all retirement benefits. If you’re thinking about where you should retire, check out this list of states not taxing retirement income as of 2022.

Federal vs. State Income Taxes

Most retirement benefits are subject to federal taxes, with a few exceptions. If you have a Roth IRA, you don’t have to worry about paying federal taxes on the money you withdraw when you retire. This is because Roth IRAs are funded with after-tax contributions, meaning income taxes have already been deducted.

Although Roth accounts have some tax advantages, they also have relatively low annual contribution limits. Most taxpayers can contribute up to $6,000 per year to their Roth IRAs. If you’re aged 50 or older, you can contribute an additional $1,000 per year, bringing the limit to $7,000. As a result, many people don’t feel comfortable using a Roth IRA as their sole source of retirement income.

The same exception applies to Roth 401(k) plans. Since these plans are funded with after-tax contributions, you don’t have to pay federal income tax on your withdrawals during retirement. Roth 401(k) plans also have much higher contribution limits than Roth IRAs—$20,500 per year for taxpayers under 50 and $27,000 for taxpayers aged 50 and older.

To reduce their risk of loss and ensure they save as much as possible for retirement, many investors choose to contribute to multiple retirement accounts during their working years. Unfortunately, unless you have one of the tax-advantaged accounts described above, there’s a good chance you’ll have to pay federal tax on each one. That makes state taxes an important consideration when planning for retirement.

States Not Taxing Retirement Income at All

Man and woman jumping up and down about states not taxing retirement income

The good news is that eight states have absolutely no income tax. So no matter what type of retirement account you have, you won’t have to pay state income tax on your withdrawals if you live in any of the following states:

  • Alaska: In addition to the lack of income tax, Alaska has an average combined sales tax rate (state + local sales tax) of just 1.76%.
  • Florida: Florida remains a popular destination for retirees due in part to its favorable tax situation. The Sunshine State has no income tax, a maximum local sales tax rate of 2% and a state sales tax rate of 6%.
  • Nevada: Nevada’s average combined sales tax rate is somewhat high at 8.23%, but many retirees put down roots in the Silver State because there’s no state income tax.
  • South Dakota: The Mount Rushmore State is appealing to retirees who plan to start small businesses when they retire, as there’s no state income tax and no corporate tax.
  • Tennessee: If you’re looking to slow down a bit when you retire, Tennessee is a great place to settle. The combined sales tax average rate is 9.55%, but there’s no state income tax. The Volunteer State also has some of the lowest property taxes in the United States.
  • Texas: Like South Dakota, Texas has no state income tax and no corporate tax. Its average combined sales tax rate is 8.2%.
  • Washington: If you don’t mind a little rain, Washington is an ideal place to retire. Although the state has an average combined sales tax rate of 9.29%, there’s no state income tax to worry about.
  • Wyoming: The Cowboy State has plenty of open space and no state income tax to boot. Its average combined sales tax rate is also fairly low, coming in at 5.22%.

States with Some Exceptions for Retirement Income

Even if you don’t retire in one of the eight states with no income tax, you may be able to limit your tax liability if you live in a state that makes exceptions for certain types of retirement benefits. New Hampshire is an interesting case, as there’s no tax on earned income. Earned income is technically any money you get from working or operating a business/farm, but New Hampshire groups retirement account withdrawals with earned income for tax purposes. That means you don’t have to pay state income tax on your retirement benefits.

The state currently does tax interest and dividends, however, so if you have any interest-bearing accounts or investments generating dividends, you’ll need to pay state income tax on them until the requirement is finally phased out on December 31, 2026.

Georgia and Pennsylvania also have some beneficial tax rules for retirees. In Georgia, there’s no state income tax on Social Security benefits. Georgia residents are also allowed to be exempt up to $65,000 in other types of retirement income. Pennsylvania exempts all Social Security payments, pension payments and income from IRA and 401(k) accounts.

Income Levels and State Taxes on Retirement Benefits

Out of 50 states, only 11 are on the list of states not taxing retirement benefits as of 2022. More than two dozen states use income levels to determine how much tax residents pay on their pensions, Social Security benefits, IRAs and 401(k) accounts. 

These states are as follows:

  • Alabama
  • Arizona
  • Arkansas
  • Colorado
  • Connecticut
  • Delaware
  • Georgia
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Missouri
  • Montana
  • New Jersey
  • New Mexico
  • New York
  • Oklahoma
  • Rhode Island
  • South Carolina
  • Virginia
  • West Virginia
  • Wisconsin

If you live in one of these states, don’t despair. You may be able to reduce your tax liability in several ways. For example, Massachusetts offers some tax credits and deductions for senior citizens and taxpayers with disabilities. 

In New Mexico, most taxpayers are now exempt from paying taxes on their Social Security benefits. The exemption is available to single filers with incomes below $100,000, married taxpayers filing separately with incomes below $75,000 and married taxpayers filing jointly with less than $150,000 in income.

Tax Planning for Retirement

Planning ahead is essential for limiting your tax liability and ensuring that your retirement savings last as long as possible. If you don’t live in one of the states not taxing retirement income, work with a financial advisor to find other ways to reduce your tax burden. A skilled financial advisor can help you assess the pros and cons of each state before you make a big move.

Before you make any big decisions, remember that state income tax isn’t the only consideration when deciding where to retire. Even if a state has no income tax, it may have high healthcare costs or higher-than-average utility costs, making it less appealing for retirees on a budget.

You might also be interested in: 11 Little Known Ways To Start Saving For Retirement Now

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