This article takes a look at the 15 states that don’t tax retirement pension payouts. If you wish to skip our detailed analysis on navigating retirement taxes, you may go to 5 States That Don’t Tax Retirement Pension Payouts.
Navigating Retirement Taxes: From Strategic Planning to State Choices
If you think taxes are going to leave you alone in retirement, think again. Contrarily, they do exist even in your golden period, underscoring the importance of proactive planning to navigate their impact effectively. According to The Charles Schwab Corporation (NYSE:SCHW), there are two “unknowns” looming in retirement: the taxable portion of your income, and their tax rate. Even though these unknowns exist, The Charles Schwab Corporation (NYSE:SCHW) asserts that it is still possible to plan for a “potentially better tax outcome”.
"One approach is to use accounts with a variety of tax treatments so you can better control your taxable income in retirement”.
The four main account types—tax-deferred, Roth, taxable, and health savings accounts (HSAs)—offer unique tax advantages. Employing strategies such as capturing employer matches, utilizing HSAs for medical expenses, maximizing tax-advantaged savings, investing tax-efficiently, and considering Roth conversions can offer a diversified and flexible approach to managing taxes in retirement.
"Anticipating future tax rates is always a bit of a guessing game, but with several account types at your disposal, there's potential to build in flexibility and a surprising level of control over future tax bills."
Employing this approach can indeed provide a measure of control over your retirement taxes. Yet, a significant number of retirees are also leveraging an alternative strategy: moving states. That’s right, a large number of homebuyers have been actively moving states in the past many years, many of whom are retirees. For the fourth consecutive year, California leads U-Haul Holding Company (NYSE:UHAL)'s Growth Index as the state with the highest number of outbound moves, according to a study conducted by U-Haul Holding Company (NYSE:UHAL). California is notorious for its high cost of living, and it is no surprise that homebuyers are looking to move out and into states that offer nicer weather, and lower cost of living. The U-Haul Holding Company (NYSE:UHAL) Report claims that their growth index “is an effective gauge of how well states and cities are attracting and maintaining residents”, even though it does not directly correlate to economic or population increases.
So where are potential retirees moving anyway? Apparently, Texas, Florida, and the Carolinas are the most popular states that individuals are moving to. Texas and Florida are not only revered for their warm climate, but also because of their attractive cost of living. Moreover, both of these states don’t tax social security. Since retirees have fixed incomes to depend on, they are increasingly favoring states that have a lower tax burden, a lower-than-average cost of living, and a warm climate to ensure they can lead a comfortable life.
This article delves into the tax landscape for retirees, specifically focusing on states that offer the advantage of not taxing retirement pension payouts. Understanding the tax landscape can significantly impact financial decisions and contribute to a more secure and informed retirement. Therefore, let us embark on this exploration to uncover how much a retiree can benefit by choosing a state that doesn’t tax retirement pension payouts.
15 States That Don't Tax Retirement Pension Payouts
To compile the list of states that don’t tax retirement pension payouts, we have filtered out all the states that tax pension incomes. Next, we ranked the states on their cost of living index and tax friendliness. Cost of living has been sourced from the Missouri Economic Research & Information Center, whereas tax-friendliness has been sourced from Smart Asset. Scores were summed up and places were ranked in ascending order from the lowest to the highest Insider Monkey Score.
By the way, Insider Monkey is an investing website that tracks the movements of corporate insiders and hedge funds. By using a similar consensus approach, we identify the best stock picks of more than 900 hedge funds investing in US stocks. The top 10 consensus stock picks of hedge funds outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). Whether you are a beginner investor or a professional one looking for the best stocks to buy, you can benefit from the wisdom of hedge funds and corporate insiders.
Here are all the states that don’t tax retirement pension payouts:
15. Hawaii
Insider Monkey Score: 2
Cost of Living Index: 180.3
Tax Friendliness: Moderately Tax-Friendly
Hawaii is considered a moderately tax-friendly state that doesn’t tax Social Security benefits or income from public and private pensions. However, other types of retirement income, such as withdrawals from retirement accounts, are charged at a high-income tax rate. The combined sales tax rate for the state is 4.4%, and even groceries are taxed. Prescription drugs, however, are tax-exempt. The average effective property tax rate is one of the lowest in the US at 0.29%, largely because home prices in the state are high. The cost of living in the state is a whopping 80.3% higher than the national average. Moderate tax-friendliness, high cost of living, and high home prices make Hawaii one of the worst states to retire to for taxes and cost of living.
14. Washington
Insider Monkey Score: 6
Cost of Living Index: 116
Tax Friendliness: Tax-Friendly
Another state that doesn’t tax your pension or social security is Washington. The state of Washington doesn’t tax any form of retirement income, which is why retirees can enjoy their fixed incomes tax-free in this state. This is good news even for the retiree who wishes to work after retirement, as they can enjoy tax-free income in the state. Property taxes in the state are also less than the national average, with the average effective property tax rate standing at 0.94%. However, the one tax this state relies on heavily for its revenue is the sales tax, which is 6.5%. The combined sales tax rate can be as high as 10.5%, whereas the cost of living is also 16% higher than the national average.
13. New Hampshire
Insider Monkey Score: 7
Cost of Living Index: 114.1
Tax Friendliness: Tax Friendly
New Hampshire is another state that doesn’t tax retirement pension payouts. The state doesn’t tax social security benefits either. However, dividends and interests are taxed for the current tax year at 5% and will continue to be taxed until it's phased out by December 2024. According to the NH Department of Revenue Administration, the I&D (Interests and Dividends) tax shall be repealed for taxable periods beginning after December 31, 2024. The state doesn’t have a sales tax, either. However, property taxes are some of the highest in the country.
12. Pennsylvania
Insider Monkey Score: 10
Cost of Living Index: 95.6
Tax Friendliness: Tax-Friendly
Next up on our list of states that don’t tax retirement pension payouts is Pennsylvania. Social Security benefits are not taxed in the state, whereas payments from retirement accounts like 401(k)s and IRAs are also tax-exempt. Income from pensions is also tax-exempt for seniors who are aged 60 or older. Moreover, the cost of living is 4.4% lower than the national average. The average total sales tax rate is 6.17%, while property taxes are quite high.
11. Texas
Insider Monkey Score: 11
Cost of Living Index: 92.7
Tax Friendliness: Tax-Friendly
Texas doesn't tax retirement income or pension payouts since there is no income tax in the state. The cost of living is also favorable for retirees, which is 7.3% lower than the national average. While the cost of living and taxes are favorable for the average retiree, the state does however earn its revenue from the high sales and property taxes in the state. The average effective property tax rate in the state is 1.9%, which is one of the highest in the country. On the other hand, the sales tax rate is about 6.25%, and the local sales tax can be as high as 2%.
10. Alaska
Insider Monkey Score: 12
Cost of Living Index: 125.2
Tax Friendliness: Very Tax-Friendly
Alaska may be known for its crazy high cost of living, but the state doesn’t tax retirement income or social security. There is no sales tax, no estate tax, and no inheritance tax either. However, there is a property tax, which stands at 1.17%. Alaska may be very tax-friendly for retirees, but the high cost of living and harsh weather tend to offset this financial advantage. No wonder it is one of the worst states to retire on social security.
9. Iowa
Insider Monkey Score: 13
Cost of Living Index: 90.3
Tax Friendliness: Moderately Tax-Friendly
Iowa is a moderately tax-friendly state to retire to, with a favorable cost of living. The living expenses in this state are 9.7% lower than the national average. Regarding taxes on retirement income, all retirement income is exempt for taxpayers who are at least 55 years old. The sales tax rate is 6%, while the combined rate can be as high as 7%. Certain exemptions are available such as on food, prescription drugs, and some types of non-prescription medication.
8. Illinois
Insider Monkey Score: 14
Cost of Living Index: 92.1
Tax Friendliness: Tax-Friendly
Another state that doesn’t tax retirement pension payouts is Illinois. The state of Illinois charges a flat individual income tax rate of 4.95%. However, seniors don’t have to pay taxes on retirement income. Income from most retirement plans is exempt from taxes, which includes payments from qualified employee benefit plans (401(k) plans and traditional pensions), government retirement plans, military pensions, and IRAs. Earnings from other sources, such as investment income, are taxable.
7. Nevada
Insider Monkey Score: 15
Cost of Living Index: 101
Tax Friendliness: Very Tax-Friendly
The state of Nevada is very tax-friendly for retirees, and the cost of living is a tad bit high (1% higher than the national average). This is because the state doesn't have an income tax, and retirees get to receive their income tax-free. Property taxes in the state are low as well, whereas sales taxes are a little higher than the national average.
6. Tennessee
Insider Monkey Score: 15
Cost of Living Index: 90.3
Tax Friendliness: Tax-Friendly
The state of Tennessee doesn’t have an income tax either. This means that at the state level, retirement income isn’t taxed for retirees. property taxes in the state are quite low as well. The average effective property tax rate is 0.65%, while the sales tax rate is 9.61%. Nevertheless, the cost of living is an advantage of retiring here, which is 9.7% lower than the national average.
