13 States Where Pensions and Retirement Income Face Zero Taxation

Retirement taxation remains one of the most overlooked aspects of financial planning. While federal taxes are unavoidable for U.S. retirees regardless of location, several states offer significant relief by exempting retirement income entirely. Understanding which states do not tax pensions, Social Security benefits, and other retirement withdrawals can substantially impact your financial strategy.

Complete Tax Freedom on Retirement Income: The 13-State Advantage

Thirteen states have established policies where no retirement income faces state-level taxation. These jurisdictions exempt Social Security benefits, pension distributions, 401(k) withdrawals, and IRA distributions from state income taxes. The complete list includes:

• Alaska
• Florida
• Illinois
• Iowa
• Mississippi
• Nevada
• New Hampshire
• Pennsylvania
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Two Categories of Retirement-Friendly States

Not all 13 states achieve this benefit through identical mechanisms. Understanding the distinction is crucial for retirement planning.

Nine states with no state income tax whatsoever naturally exempt all retirement income:

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming eliminate state income taxation entirely. This blanket approach means retirement income receives the same treatment as all other income sources.

However, Washington presents a notable exception: while it doesn’t tax traditional retirement benefits, it does levy taxes on capital gains. A 2024 ballot initiative to eliminate this capital gains tax failed to gain sufficient voter support.

Four states with targeted retirement tax benefits have implemented specific policies to protect retirees:

Illinois, Iowa, Mississippi, and Pennsylvania crafted legislation specifically exempting retirement income from taxation, even though these states maintain income tax systems. Each state approaches this differently. Notably, Mississippi and Pennsylvania impose restrictions by taxing early distributions from retirement accounts—a consideration for those younger retirees accessing funds before traditional retirement age.

The Broader Tax Landscape: Partial Exemptions Across America

Beyond these 13 states, many others provide partial retirement income protection. Approximately 29 additional states exempt Social Security benefits from state taxation, even if other retirement income remains subject to state taxes.

Alabama stands out by offering dual protections: no Social Security taxation and no taxation on pension income from defined benefit retirement plans. Hawaii provides relief specifically for distributions from pension and private plans that funded contributions through non-retiree sources.

Federal Taxation: Where Uncle Sam Still Collects

State tax relief doesn’t eliminate federal obligations. The U.S. government maintains authority over federal income taxes regardless of state residence. However, Social Security benefits receive partial federal protection depending on combined income levels.

The federal taxation structure for Social Security works as follows:

For individual filers:

• Combined income below $25,000: No Social Security taxation
• Combined income $25,000-$34,000: Up to 50% of benefits taxable
• Combined income exceeding $34,000: Up to 85% of benefits taxable

For married couples filing jointly:

• Combined income below $32,000: No Social Security taxation
• Combined income $32,000-$44,000: Up to 50% of benefits taxable
• Combined income exceeding $44,000: Up to 85% of benefits taxable

For married couples filing separately: Up to 85% of benefits remain taxable at any income level.

Combined income includes adjusted gross income, nontaxable interest, and half of Social Security benefits.

Future Changes on the Horizon

Recent political developments suggest potential shifts in federal retirement taxation policy. Presidential campaign platforms have included proposals to eliminate federal income taxes on Social Security retirement benefits entirely. Such changes could allow retirees to retain substantially more income moving forward.

Strategic Planning for Retirement Tax Optimization

For those approaching or entering retirement, understanding both state and federal taxation frameworks proves essential. Retirees in the 13 states exempt from retirement taxation benefit from keeping more income, though they remain subject to federal obligations. Those in other states should explore which specific retirement income streams receive protection.

Maximizing retirement income requires understanding not just where you live, but how different income sources face taxation at both state and federal levels. Strategic planning around these tax implications can result in thousands of additional dollars retained annually throughout retirement years.