It's True: These 13 States Don't Tax Retirement Income

Are you looking to minimize your tax bill? Most people are. After all, that's money that could otherwise be invested, spent on a purchase of your choosing, or just put in your pocket!

Taxes can never be entirely avoided, of course. For most retirees, however, they can be limited just by living out your retirement in a particular state. See, although you'll always be subject to federal income tax, there are 13 states that don't tax retirement income -- at all.

Here's a rundown of those states.

States that don't tax retirement income

Don't get too excited just yet. Nine of these states don't tax retirement income simply because they don't impose any state income tax on anyone at all, retired or not. These nine states are:

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

* Although New Hampshire doesn't charge its residents income tax, through the end of this year it will impose tax on any annual interest and dividend income in excess of $2,400. Beginning next year, however, this tax will no longer apply.

And the other four? While these states do tax their residents' wages, in most cases they still exclude income from sources like 401(k) accounts, IRAs , pensions , and Social Security benefits from state-level taxation:

• Illinois
• Iowa
• Mississippi
• Pennsylvania

That being said, do know that while Alabama and Hawaii tax 401(k) and other IRA distributions, neither one taxes pension income. You should also know that while most states (and the District of Columbia) don't tax Social Security income regardless of other types of state income taxes, in eight states at least some Social Security retirement benefits may be subject to state-based income taxation. Fortunately, the bulk of their retired residents won't actually owe such taxes, since they don't pass reasonably generous income thresholds. The states where Social Security payments are still subject to state taxation are:

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont

Meanwhile, West Virginia is phasing out its taxation of Social Security retirement benefits. Only 65% of West Virginians' Social Security income is subject to state taxes this year, and only 35% next year. This phase-out will be complete for tax-year 2026.

Something to think about, but do think enough about it

It can be complicated if you're genuinely interested enough in lowering your tax liability in retirement to relocate to another state. If Social Security is your biggest source of income, you may be better served in certain states, but you may be better off in other states if your 401(k) accounts or IRAs will be your top source of retirement income.

Also bear in mind that you'll still be subject to federal taxes regardless of where you live. This remains the biggest piece of most people's annual income tax bill.

Image source: Getty Images.

Even if you figure out the state that optimizes your tax situation, there are other considerations. Chief among them is the cost of living in a particular state. Some of the tax-friendly states listed above have proven particularly expensive to live in.

For instance, home prices in Florida have soared as hundreds of thousands of people have flocked to the state in search of tax-free living. Real estate taxes are racing higher in many Florida towns and cities as well, with infrastructure and governmental spending unable to keep up with population growth and rising administration costs. Before making a life-changing move, be sure to crunch all the numbers.

Also, consider the weather where you're thinking about moving, particularly if it might affect your health. Alaska can get pretty cold. Nevada can get awfully hot, and dry. You'll also want to think about the friends and family you could be leaving behind. Sometimes a little extra money isn't always worth it.

Still, for the average retiree, moving to a tax-friendlier state could save you thousands of dollars per year.

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