I have talked with several of you who are weighing the benefits of moving to certain states in your retirement years, specifically because of how state taxes could impact your income. It is a thoughtful question and a wise one. When you have spent decades building your savings, where you choose to live can meaningfully affect how far that money stretches.
In this first part, we are looking at states that do not have a state income tax at all. When there is no state income tax, retirement income is not taxed at the state level. That includes Social Security benefits, distributions from 401k and IRA accounts, and pension income.
What No State Income Tax Really Means
A state with no income tax does not tax wages, investment income, or retirement income. From a simplicity standpoint, these states are appealing because the rules are straightforward. Whatever you withdraw from your retirement accounts will not generate a state income tax bill.
That said, these states still fund public services in other ways. Sales taxes, property taxes, and fees often play a larger role. So while income taxes may disappear, the overall cost of living still deserves careful consideration.
States With No State Income Tax
The following states do not impose a state income tax and therefore do not tax retirement income.
Alaska offers no state income tax and no estate or inheritance tax. Some residents also receive an annual payment through the Alaska Permanent Fund. However, local sales taxes can be high in certain areas, and costs vary significantly by location.
Florida is a popular retirement destination for good reason. There is no state income tax, no tax on retirement income, and no estate or inheritance tax. Florida does rely on sales taxes, but many essentials are exempt, and property taxes are relatively moderate.
Nevada also has no income tax and no estate or inheritance tax. Property taxes are among the lowest in the country, though sales taxes are higher than average.
New Hampshire does not tax earned income or retirement income. It is also one of the few states with no sales tax. Property taxes can be higher, which is an important factor for homeowners.
South Dakota has no income tax and no estate or inheritance tax. Groceries are taxed, and sales taxes fund much of the state budget.
Tennessee eliminated its income tax entirely, including taxes on retirement income. Sales taxes are higher, especially on non essential goods.
Texas does not tax income and offers a generous homestead exemption for homeowners over age sixty five. Property taxes can be higher, and sales taxes vary by locality.
Washington does not tax retirement income but does impose a capital gains tax on large investment gains. Estate taxes can also be significant for higher value estates.
Wyoming is one of the most tax friendly states overall, with no income tax, no estate tax, and relatively low sales taxes.
Why These States Appeal to Retirees
For many retirees, the appeal lies in predictability. Knowing that retirement income will not be taxed by the state makes budgeting easier and allows savings to stretch further over time.
However, no income tax does not automatically mean lower overall costs. Housing, healthcare, climate, proximity to family, and community all matter just as much as tax policy.
In a Nutshell
States with no state income tax can offer meaningful advantages in retirement, particularly for those living off distributions from retirement accounts. These states remove one major tax burden, but they replace it with other forms of taxation.
Next week, we will look at states that do have an income tax but specifically exempt retirement income. Some of those states may surprise you.