The 13 States Where Your Pension and Social Security Stay Untaxed

Choosing the right location to spend your post-retirement years can significantly impact your overall financial well-being. In the United States, most states impose income tax on pensioners, but some have adopted a more retiree-friendly approach. 

By understanding these states with no pension tax, you can make a more informed decision about where to relocate and maximize your retirement income. So, today, we will discuss about 13 U.S. states where your pension and social security remain untouched.

What States Don’t Tax Retirement Income?

When choosing your retirement destination, considering the state income tax is a crucial factor. Some states have adopted retiree-friendly policies that exempt pension and social security benefits from state income tax, offering retirees a break. 

Let's take a close at the top 13 states with no pension tax:

Alaska

Alaska’s tax structure does not include a state income tax, making it attractive for retirees. The Permanent Fund Dividend (PFD) provides a yearly dividend from the state’s oil wealth.

• Cost of Living: Higher than the national average, especially in urban areas, but the PFD can help offset costs.
• Healthcare Access: Challenging due to remote location and limited resources; consider specific healthcare needs.
• Retirement Communities: Less common but available in Anchorage and Fairbanks.

Florida

Florida’s lack of state income tax makes it popular for retirees, significantly reducing the tax burden on retirement income.

• Cost of Living: Generally lower than in many states but varies by location; coastal areas like Miami and Fort Lauderdale are more expensive.
• Healthcare Access: Large healthcare system with varying quality and availability; specialized care may be limited in some areas.
• Retirement Communities: Leading state for retirement communities, offering diverse options to suit various preferences and budgets.

Georgia

Georgia’s state income tax is relatively low, making it moderately tax-friendly for retirees. The homestead exemption can reduce property taxes for homeowners.

• Cost of Living: It is lower than in states like California and New York, but it varies by location; urban areas like Atlanta are more expensive.
• Healthcare Access: Large healthcare system with varying quality and availability; numerous hospitals, clinics, and specialists.
• Retirement Communities: A growing number of retirement communities, especially in southern and coastal regions, offer various amenities and services.

Hawaii

Hawaii has no state income tax, making it attractive for retirees seeking to avoid state-level income taxation.

• Cost of Living: It is significantly higher than the national average, making it one of the most expensive places to live in the U.S.
• Healthcare Access: Good but varies by location; strong healthcare system with several major hospitals and clinics.
• Retirement Communities: Several options are available, particularly on Oahu and Maui, offering ocean views, swimming pools, and access to outdoor activities.

Idaho

Idaho has no state income tax on social security benefits and offers a property tax circuit breaker program for seniors. There is also a partial exemption for pension income if certain age and income requirements are met.

• Cost of Living: Lower than the national average, making it affordable for retirees.
• Healthcare Access: Strong healthcare system with hospitals and clinics statewide.
• Retirement Communities: There are various options, including active adult communities, senior housing, and assisted living facilities. Popular destinations include Boise, Coeur d’Alene, and Sun Valley.

Kentucky

Kentucky has no state estate or inheritance tax, boosting retirement savings.

• Cost of Living: Lower in rural areas; state sales tax is 6%.
• Healthcare Access: Wide selection of Medicare Advantage plans with additional benefits.
• Retirement Communities: There is a range of options, from active communities with amenities to peaceful rural living. Popular communities include the Villages of Lexington and Summit at Lake Cumberland.

Mississippi

Mississippi offers a homestead exemption for seniors, reducing property taxes—no sales tax on medicine and medical care.

• Cost of Living: Lower than many states, including housing, utilities, food, and transportation.
• Healthcare Access: Network of hospitals and clinics; several Medicare Advantage plans with additional benefits.
• Retirement Communities: Variety of options, including CCRCs and rural communities.

Montana

Montana has no state income or capital gains tax and offers property tax exemptions or credits.

• Cost of Living: Slightly below the national average, making it affordable for retirees.
• Healthcare Access: Comparable to the national average, costs vary by insurance and medical needs.
• Retirement Communities: Along with the pension tax exemptions by state, diverse amenities are available in popular destinations like Missoula, Kalispell, and Bozeman.

Nevada

Nevada is known for its favorable tax climate for retirees, with no pension or capital gains tax, but it does have property and sales tax.

• Cost of Living: Higher in major cities like Reno and Las Vegas, but overall comparable.
• Healthcare Access: Mix of public and private providers; major cities have well-established medical facilities and specialists.
• Retirement Communities: Highlighted by recreational facilities and a variety of social and healthcare services.

New Hampshire

New Hampshire is ideal for retirees on Social Security, with no income tax and stunning natural beauty.

• Cost of Living: Relatively affordable compared to many northeastern states.
• Healthcare Access: Major cities like Manchester and Concord offer a wide range of services; rural areas have more limited options but generally good infrastructure.
• Retirement Communities: Include amenities like swimming pools, fitness centers, and golf courses, especially in the Monadnock region.

North Dakota

North Dakota is one of the states with no pension tax, as well as low-income tax. Some municipalities also offer property tax breaks for qualifying retirees.

• Cost of Living: Housing in this state is affordable, especially outside major cities. Utilities are generally lower priced.

• Healthcare Access: The healthcare system in urban areas, like Bismark and Fargo, is impeccable. It's limited to rural areas, but telehealth options are available.

• Retirement Communities: Unfortunately, North Dakota has a limited number of retirement communities, which are available only in larger cities.

South Dakota

South Dakota has no income tax, including on pensions and Social Security benefits, allowing retirees to keep their entire income.

• Cost of Living: Generally affordable with low housing, utilities, and grocery costs.
• Healthcare Access: Strong healthcare system with hospitals and clinics statewide.
• Retirement Communities: Sioux Falls offers various options, including senior housing and assisted living; smaller towns provide a relaxed, affordable lifestyle.

Tennessee

Among the states with no pension tax, Tennessee stands out as one of the best states to retire tax-free, with an average effective property tax rate of just 0.65%.

• Cost of Living: Tennessee has one of the highest sales tax rates in the country, which can impact the overall cost of living for retirees.
• Healthcare Access: Tennessee has a strong healthcare system with numerous hospitals and clinics located throughout the state.
• Retirement Communities: Nashville is the largest city in Tennessee and offers a variety of retirement living options, including senior housing and assisted living facilities.

Reverse Mortgages: An Additional Tool for Maximizing Retirement Income

A reverse mortgage is a financial tool designed for homeowners aged 62 or above. This tool allows them to borrow against the equity in their home. Unlike traditional mortgages, where you pay the lender, a reverse mortgage provides you with income. 

Some of the benefits of a reverse mortgage include reduced financial stress and preservation of retirement savings.

When looking for retirement states with no state income tax on Social Security, also consider reverse mortgage programs. When it comes to reverse mortgage programs, consider your eligibility, loan terms, counseling, and tax implications.

Common Tax Myths and Mistakes to Avoid

When it comes to tax-free retirement, there are some of the most common myths and mistakes that you need to avoid:

Myth 1: Moving to a Tax-Free State Solves All Retirement Income Problems

Moving to one of the retirement-friendly states in 2024 can lessen your tax burden, but it’s not a silver bullet. Other things play a role, too, including:

• Property taxes 
• Sales taxes 
• Healthcare costs 

Myth 2: States With No Income Tax Are Always the Best Option

Zero income tax is a big break, but income tax isn’t the only form of tax. Be sure you take a good hard look at the overall taxation culture of the state before moving. It might also be a good idea to factor in the cost of living, healthcare availability, and your lifestyle and preferences.

Myth 3: Social Security is Tax-Free Everywhere

Not all states offer tax-free incentives on Social Security. Even in the 13 states where Social Security is not taxed, if your overall income exceeds a certain threshold, you might end up with some of your Social Security taxed indirectly. It’s a good idea to hire a professional and make sure your bases are covered.

FAQs About Retirement Taxes

Which states don’t tax 401(k) withdrawals?

All states that don’t tax pensions and Social Security benefits also do not tax 401(k) withdrawals. This includes Alaska, Florida, Georgia, Hawaii, Idaho, Kentucky, Mississippi, Montana, Nevada, New Hampshire, North Dakota, South Dakota, and Tennessee.

How do state taxes on retirement income affect my overall financial plan?

Your state's tax culture has a big impact on your financial plan. A more favorable taxation scheme can increase retirement income and reduce the overall burden from taxes. 

What should I consider before moving to a tax-friendly state?

Before moving to a tax-friendly state, consider the culture, living expenses, healthcare, climate, and overall livability, keeping your needs in mind. It’s better to live in a state that offers fewer benefits but is comfortable than to be stuck somewhere you hate living to save.

Do these states offer other senior-friendly tax benefits (e.g., property tax breaks)?

Many states that don't tax retirement income also offer additional senior-friendly tax benefits. For example, Florida provides a homestead exemption that reduces property taxes for qualifying seniors, and Georgia exempts seniors from sales tax on prescription medications.

How can I minimize my federal taxes in retirement?

To reduce federal taxes in retirement, try these strategies: convert traditional IRA or 401(k) funds to Roth accounts when in a lower tax bracket, donate directly from IRAs to charities if you’re 70½ or older, sell investments with losses to offset gains, and use tax-deferred annuities to delay taxes until withdrawal. 

Final Thoughts on Choosing a Tax-Friendly State for Retirement

Selecting the right retirement destination can influence your financial well-being in the long term. Still thinking, what states do not tax retirement income? This guide includes a detailed list of 13 tax-free Social Security states in the U.S. that offer significant tax breaks for retirees by exempting pensions. 

If you are still unsure of which location to choose or want a more detailed understanding, book a consultation today.