Avoiding taxes is often tough. Sometimes you can avoid one in a state while paying for another. Social Security retirement benefit taxes, such as those for pensions, IRAs, and 401(k), are not pleasant at all.
For those enjoying retirement, the subject of whether or not to pay state taxes on their retirement income can vary. Fortunately, 13 states provide tax relief by not taxing Social Security, 401(k), individual retirement account (IRA), or pension income.
The State where you live is key to avoid taxes on Social Security benefits
Your location can significantly influence your tax obligations. Currently, nine states do not impose a personal income tax at all:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
While the benefits are appealing, it’s important to be aware of some potential situations that may catch you off guard in these states.
Are you a retiree or about to retire and curious about the tax consequences in different states? You are in the correct place! Let’s look at how different states manage retirement income taxes, with an emphasis on those that provide advantageous terms for your hard-earned funds.
New Hampshire: A Tax-Friendly State for Retirees
While New Hampshire does not have a state income tax, it does charge taxes on dividends and interest. The good news for retirees is that these taxes will not apply to dividend and interest income earned within an IRA or 401(k). Even more exciting, New Hampshire plans to eliminate these taxes entirely after 2024.
Washington: Capital Gains Tax Consideration
In contrast, the state of Washington imposes taxes on capital gains. Although there was an initiative to eliminate these taxes, voters chose to maintain them for the foreseeable future.
States Without Income Tax on Retirement Income
While most U.S. states have an income tax, four states stand out because they don’t tax retirement income—whether from Social Security, 401(k) plans, IRAs, or pensions. These states include:
- Mississippi
- Pennsylvania
- Illinois
- Iowa
Timing Matters: Early Withdrawals
It’s vital to understand that withdrawing money from a retirement account might have an impact on your tax liabilities. For example, in Mississippi, early payouts are not considered retirement income and may be taxed. Similarly, Pennsylvania taxes early distributions. Timing your withdrawals carefully may save you money in the long run.
Retirement planning is an important part of financial security, and knowing how different states tax retirement income can have a substantial impact on your financial future. Here’s a closer look at how the two states approach retirement taxation, as well as an overview of other states’ Social Security benefit laws.
Alabama’s Approach to Retirement Income Taxation
Alabama taxes retirement income from 401(k) plans and IRAs. However, there is one bright lining: Alabama does not tax Social Security retirement benefits or income from a defined benefit retirement plan. This can bring some relief to retirees who rely on these types of income.
Hawaii’s Tax Policy on Pensions
Hawaii has a more advantageous tax climate for retirees when it comes to pensions. The state will not tax retirement distributions from either private or public pension schemes if the retirees did not contribute to them. For plans with employee contributions, only the percentage of the increased value due to such contributions is taxable.
What About Other States?
If you are retired and live in a state not listed above, here is some news to consider. The bad news is that you may have to pay state taxes on some of your retirement income. Fortunately, there is a silver lining!
States That Don’t Tax Social Security Benefits
Many states offer relief by not taxing Social Security benefits. Below is a list of states, apart from the 13 states that exempt all retirement income from taxation, where Social Security is not taxed:
- Wisconsin
- Virginia
- South Carolina
- Oregon
- Oklahoma
- Ohio
- North Dakota
- North Carolina
- New York
- New Jersey
- Nebraska
- Missouri
- Michigan
- Massachusetts
- Maryland
- Maine
- Louisiana
- Kentucky
- Kansas
- Indiana
- Idaho
- Hawaii
- Georgia
- Delaware
- California
- Arkansas
- Arizona
- Alabama
Learning more about these tax policies can help you better plan for your retirement and make informed decisions about where to retire. Whether you’re considering a move or simply want to maximize your income, knowing these details is essential.
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