States That Will Exempt Retirement Income from Taxation in 2025
As retirees seek to maximise their disposable income, understanding the tax implications of relocating can be crucial. In the United States, several states have made retirement more attractive by exempting pension income, Social Security benefits, and distributions from 401(k) and IRA accounts from state income tax.
States with No State Income Tax
Several states, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, do not impose any state income tax, making them ideal destinations for those looking to avoid taxation on their retirement income.
States with Specific Exemptions
In addition to the states with no income tax, some states have specific exemptions for these retirement incomes. Illinois, Mississippi, and Pennsylvania are among these states.
Mississippi, for instance, exempts all Social Security benefits, pensions, 401(k), and IRA distributions from state income tax. Pennsylvania exempts pension income and retirement account distributions (unless withdrawn early) and does not tax Social Security benefits. New Hampshire, which currently has a tax on interest and dividends, plans to completely repeal this tax by 2025, making it a tax-free haven for pensions, 401(k), IRAs, and Social Security benefits.
Comparison Table
The table below provides a comparison of these states based on their tax policies regarding retirement income:
| State | No Income Tax | Pension Tax Exemptions | Social Security Tax Exempt | 401(k) & IRA Tax Exempt | |-----------------|---------------|-----------------------|----------------------------|------------------------| | Alaska | Yes | Yes | Yes | Yes | | Florida | Yes | Yes | Yes | Yes | | Nevada | Yes | Yes | Yes | Yes | | New Hampshire | Yes (from 2025) | Yes | Yes | Yes | | South Dakota | Yes | Yes | Yes | Yes | | Tennessee | Yes | Yes | Yes | Yes | | Texas | Yes | Yes | Yes | Yes | | Washington | Yes | Yes | Yes | Yes | | Wyoming | Yes | Yes | Yes | Yes | | Illinois | No | Yes | Yes | Yes | | Mississippi | No | Yes | Yes | Yes | | Pennsylvania | No | Yes (eligible plans) | Yes | Yes |
Relocating to these states can often result in no state income tax on all forms of retirement income, significantly increasing retirees' disposable income. However, it's essential to consider other factors such as sales tax, property tax, and inheritance tax when deciding where to retire.
For example, Tennessee has a sales tax rate of 7% for goods and services, while groceries are taxed at 4%. Pennsylvania levies a hefty inheritance tax, with children over 21 years old paying an inheritance tax of 4.5%, and all other heirs facing a tax rate of up to 15%. Washington state recently approved a new capital gains tax increase for 2025, with gains over $1 million now charged an additional 2.9% tax.
In conclusion, understanding the tax implications of retirement in different states can help retirees make informed decisions about where to live. With several states offering exemptions on pension, Social Security, and retirement account income, the options for tax-friendly retirement destinations are plentiful.
Retirees who aim to minimize their tax burden on personal-finance matters might find thedefi states with no state income tax, such as Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, particularly attractive. Furthermore, certain states like Illinois, Mississippi, and Pennsylvania offer exemptions for Social Security benefits, pensions, and retirement account distributions (401(k) and IRA) from state income tax, providing alternative tax-friendly opportunities for personal-finance management in retirement.
