Twelveteen States Exempting Social Security, 401(k), IRA, or Pension Revenue from Taxation

Twelveteen States Exempting Social Security, 401(k), IRA, or Pension Revenue from Taxation

Old Ben Franklin may have been on point about death and taxes being the only certainties in life, but he missed a beat when it comes to retirement income. You see, if you've hung up your work boots, there's a chance you could dodge paying state taxes on that income.

So, what states are introducing some uncertainty into Old Ben's certainty? Well, let me tell you, thirteen of them! These states won't hit your retirement pocketbook with taxes on Social Security, 401(k)s, IRAs, or pensions.

States with Zilch Income Tax

Depending on your location, you might not have to wait until retirement to get a break from paying income taxes. Nine lucky duck states currently skip paying income taxes altogether:

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

But before you break out the champagne, hold your horses. There are a couple of caveats up in New Hampshire and Washington.

In New Hampshire, the state does levy taxes on dividends and interest. However, the good news is that you won't owe taxes on that income if it's earned within an IRA or 401(k). And get this, New Hampshire plans to phase out those taxes after 2024.

As for Washington, it taxes capital gains. But, there's a chance it could change next year, as voters rejected an initiative to eliminate the taxes.

States with Income Taxes but No Retirement Income Taxes

All the other 36 states in the United States still have income taxes. But don't fret, because four of them don't tax retirement income, including money from Social Security, 401(k) plans, IRAs, or pensions:

• Illinois
• Iowa
• Mississippi
• Pennsylvania

However, be careful in Mississippi and Pennsylvania with early retirement fund withdrawals. In Mississippi, early distributions aren't considered retirement income, which could mean taxes. While in Pennsylvania, early withdrawals are still taxed.

Alabama and Hawaii also deserve special mention. Alabama will tax retirement income from 401(k)s and IRAs, but Social Security retirement benefits and pension income from a defined benefit retirement plan are exempt.

As for Hawaii, any retirement distributions from private or public pension plans will escape taxes as long as retirees don't contribute to the plans. Retirement plans with employee contributions will only be taxed on the portion of increased value resulting from those contributions.

Social Security Isn't Taxed in Many States

If you're retired and living in a state not listed above, you might still have to pay taxes on some of your retirement income. However, there's good news: Many states won't tax your Social Security benefits.

Here are the states (besides the 13 that don't tax any retirement income) that won't give a hoot about your Social Security:

• Alabama
• Arizona
• Arkansas
• California
• Delaware
• Georgia
• Hawaii
• Idaho
• Indiana
• Kansas
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Missouri
• Nebraska
• New Jersey
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• South Carolina
• Virginia
• Wisconsin

But keep in mind, even if you live in a state where retirement income isn't taxed, you'll still pay taxes in other forms. If you own a house, property taxes are unavoidable. And most states have sales taxes (the exceptions being Alaska, Delaware, Montana, New Hampshire, and Oregon).

So, while Old Ben's statement about taxes being certain still holds true, retirees can lower their tax bill by picking their retirement spot strategically.

In light of Old Ben Franklin's observation, strategically choosing a retirement location can potentially reduce tax burdens. For instance, retirees in Illinois, Iowa, Mississippi, and Pennsylvania are exempt from state taxes on Social Security, 401(k)s, IRAs, and pensions, providing some financial relief in retirement.

Furthermore, in some states like Alaska, Florida, Nevada, and others, retirees benefit from not paying income taxes at all, adding to their retirement savings. Although there are caveats, such as dividend and interest taxes in New Hampshire and capital gains taxes in Washington, the overall financial impact on retirement income can be significant.

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