Which States Offer the Best Tax Breaks for Retirement Savings? A State-by-State Guide to Retirement Income Taxation

Understanding the Retirement Tax Landscape

When planning your retirement, most people focus on how much they’ve saved—but few consider where they’ll live. Your state of residence plays a surprising role in determining how much tax you’ll owe on retirement income. While the federal government has specific rules about Social Security, 401(k) withdrawals, IRAs, and pensions, individual states have taken wildly different approaches to taxing these same income streams.

The gap between living in a tax-friendly state versus a tax-heavy one could mean tens of thousands of dollars over your retirement years. Here’s what you need to know about navigating the state tax system.

Nine States with Zero Income Tax: The Ultimate Retirement Haven

The simplest way to eliminate retirement income taxes? Move to one of the nine states that don’t tax income at all. These jurisdictions exempt Social Security, pension distributions, 401(k) and IRA withdrawals, and any other earnings:

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

Residents of these states pay no state income tax whatsoever, making them attractive for retirees seeking to maximize their disposable income.

Seven States with Targeted Retirement Income Exemptions

If zero-income-tax states aren’t an option, consider these seven states that offer partial or full exemptions on retirement income:

Illinois & Mississippi & Pennsylvania offer blanket exemptions on all retirement income—Social Security, IRA distributions, 401(k) withdrawals, and pensions are entirely tax-free at the state level.

Iowa makes distributions from retirement accounts and pensions tax-exempt for those over 55, while Social Security is exempt regardless of age.

New Hampshire exempts Social Security and pension income, though interest and dividends from retirement accounts were previously taxed (that tax has now been phased out).

Arkansas allows residents age 59½ and older to exclude up to $6,000 annually from IRA and pension distributions.

South Carolina offers a sliding scale: those under 65 can deduct up to $3,000 in retirement income, while those 65 and older can deduct up to $10,000. Social Security is fully exempt.

Why Federal Taxes Still Matter—Even When Your State Doesn’t Tax Retirement Income

Here’s the critical detail most retirees miss: avoiding state taxes on retirement income doesn’t mean you escape federal taxation. The IRS taxes Social Security benefits based on your “combined income”—a calculation that includes your adjusted gross income plus half your annual Social Security benefit plus any nontaxable interest.

Once the IRS calculates your combined income, it applies these thresholds:

For example, a single filer with a combined income of $30,000 could have up to $15,000 of their Social Security benefits added to taxable income and taxed at ordinary rates.

The Social Security Tax Holdouts: Nine States Still Tax Benefits

While 41 states and Washington, D.C., leave Social Security benefits alone, nine states maintain Social Security taxes:

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia (phasing out completely by 2026)

Maximizing Your Retirement Income Strategy

The difference between a retiree in a tax-friendly state versus a high-tax state can be substantial. Understanding both state and federal tax implications allows you to make smarter decisions about when to claim benefits, where to locate in retirement, and how to structure your withdrawals from retirement accounts and pensions.

Beyond state selection, many retirees overlook specific Social Security optimization strategies that could add thousands to their annual retirement income. A comprehensive approach to retirement planning considers not just where you live, but when you claim, how you withdraw from accounts, and which income sources to tap first.

The goal isn’t just to reduce taxes—it’s to build a retirement strategy that lets you keep more of what you’ve earned.