On many occasions, it is quite difficult to avoid taxes. Sometimes, you may avoid one in a State, but you may be paying for a different one. Social Security retirement benefit taxes like those for pensions, IRA, 401(k) are not pleasant at all.
For those enjoying their retirement, the question of whether you need to pay state taxes on your retirement income can vary. Fortunately, there are 13 states that offer tax relief by not taxing your 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 enticing, it’s essential to be aware of some potential situations that could catch you off guard associated with these states.
Are you a retiree or planning for retirement and curious about tax implications across different states? You’re in the right place! Let’s dive into how various states handle taxes on retirement income, with a focus on those that offer favorable conditions for your hard-earned savings.
New Hampshire: A Tax-Friendly State for Retirees
While New Hampshire doesn’t impose a state income tax, it does levy taxes on dividends and interest. The great news for retirees is that you won’t need to worry about these taxes on dividend and interest income within an IRA or 401(k). Even more exciting, New Hampshire is set to phase out 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 important to note that when you withdraw money from a retirement account can impact your tax obligations. For instance, in Mississippi, early distributions are not considered retirement income and may be subject to taxes. Similarly, Pennsylvania also taxes early distributions. Timing your withdrawals wisely could save you money in the long run.
Retirement planning is a crucial aspect of financial security, and understanding how different states tax retirement income can significantly impact your financial future. Here’s a closer look at how the two states handle retirement taxation, as well as an overview of other states’ policies on Social Security benefits.
Alabama’s Approach to Retirement Income Taxation
In Alabama, retirement income from 401(k) plans and IRAs is subject to state taxes. However, there’s a silver lining: Alabama does not tax Social Security retirement benefits or income from a defined benefit retirement plan. This can provide some relief for retirees relying on these sources of income.
Hawaii’s Tax Policy on Pensions
Hawaii offers a more favorable tax environment for retirees when it comes to pension plans. The state won’t tax any retirement distributions from both private and public pension plans, provided that retirees did not contribute to these plans. For plans with employee contributions, only the portion of increased value resulting from those contributions is taxable.
What About Other States?
If you’re retired and living in a state not mentioned above, here’s some news to consider. The not-so-great news is that you might face state taxes on some of your retirement income. However, 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.
