Which States Offer the Best Tax Treatment for Retirement Pensions and Federal Taxes on Pensions by State

When planning retirement, understanding how your home state taxes retirement income could be the difference between a comfortable nest egg and a significantly reduced one. The taxation of retirement income—including Social Security, pension payouts, 401(k) withdrawals, IRAs, and military benefits—varies dramatically depending on where you choose to settle.

States With Zero State Income Tax: The Ultimate Tax Haven

Nine states have eliminated state income tax entirely, making them extraordinarily attractive for retirees. These jurisdictions—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—don’t tax any form of retirement income, including Social Security, pensions, investment portfolios, or estates. This zero-tax environment means your retirement funds can stretch significantly further.

The Social Security and Pension-Friendly States

Beyond the no-income-tax states, a substantial number of states offer relief specifically on Social Security and traditional pension income:

Complete pension exemption states include Alabama, Arkansas, Hawaii, Illinois, Mississippi, Pennsylvania, Rhode Island, and Vermont. These states recognize the importance of defined benefit pensions and exclude them from taxation.

Social Security exemptions are more widespread, with over 30 states providing some level of relief on Social Security benefits. States like Arizona, California, Georgia, Indiana, Kentucky, Maryland, and Oregon are particularly retiree-friendly in this regard.

The Federal Taxes on Pensions by State Breakdown: Mixed-Bag Jurisdictions

Several states take a middle-ground approach, taxing certain retirement income streams while exempting others:

Colorado, Kansas, Michigan, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Utah, and West Virginia tax Social Security benefits but may provide exemptions for pensions or military retirement income.

New Hampshire and Alabama offer an interesting quirk—they exclude traditional pensions but tax 401(k) and IRA distributions, creating complexity for retirees with multiple income sources.

Hawaii similarly taxes retirement account withdrawals while sparing pension income from taxation.

Military Retirement Benefits: Special Considerations

Military retirees receive preferential treatment across nearly all states. Only Connecticut lacks a specific military retirement exemption, while all other states provide either full exemption or substantial relief on military pension income. This recognition spans from states with no income tax to those with moderate tax burdens.

Estate and Inheritance Tax Implications

Beyond income taxation, the treatment of estates and inherited assets matters for legacy planning. Most states exempt estates and inheritance from state taxation. Only Iowa uses Social Security and pension income to determine filing status rather than for direct taxation purposes—a nuanced distinction that can affect your overall tax position.

Strategic Implications for Retirees

The variation in federal taxes on pensions by state reveals a clear pattern: retirees have significant opportunities to optimize their tax situation through relocation. The differential between a state that taxes all retirement income and one that exempts it entirely could translate to thousands of dollars annually in tax savings.

For those drawing from multiple retirement income sources—Social Security, pensions, 401(k)s, IRAs, and military benefits—the state selection becomes even more critical. A retiree with diverse income streams might save substantially by choosing a state that aligns with their specific income composition.

Whether you’re relying primarily on Social Security, living off a traditional pension, drawing from tax-deferred accounts, or combining multiple sources, understanding your state’s tax treatment of each income stream is essential planning information. The most tax-efficient retirement isn’t about the size of your nest egg—it’s about how much of it you get to keep.