When planning for retirement, your potential new home’s climate and proximity to family are important. But one of the most critical factors for your financial health is the state’s tax policy. Choosing a tax-friendly state for retirement can save you thousands of dollars annually, stretching your nest egg further than you ever thought possible. This guide breaks down the best states for retirees based on their treatment of income, Social Security, and other key taxes.
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The Top Tier: States with No State Income Tax
For the ultimate in tax simplicity and savings, nothing beats living in a state with no income tax. This means your Social Security benefits, pension payments, 401(k) and IRA withdrawals, and any part-time work are completely free from state income tax.
The states with no state income tax in 2025 are:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Wyoming
Also Consider: New Hampshire currently only taxes interest and dividend income, and Washington has no general income tax but does have a capital gains tax on the sale of certain assets for high earners.
The Excellent Contenders: Tax-Friendly States with an Income Tax
Many states with an income tax can still be incredibly tax-friendly for seniors by offering generous exemptions on retirement income.
States That Don’t Tax Social Security AND Offer Pension/IRA Exclusions
These states represent the next best thing, providing significant relief for most retirees:
- Illinois: A standout choice. Illinois exempts nearly all retirement income, including Social Security, pensions, and distributions from IRAs and 401(k)s.
- Pennsylvania: Similar to Illinois, Pennsylvania does not tax Social Security benefits or payments from most eligible retirement plans.
- Mississippi: Another state that offers a full exemption for Social Security and qualified retirement income.
- Alabama & Hawaii: Both states exempt Social Security and offer exemptions for most pension income, making them surprisingly attractive options.
Many other states offer partial deductions for retirement income, which can still result in substantial savings.
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States That Are Generally Less Tax-Friendly for Retirees
On the other end of the spectrum, some states offer fewer tax breaks for seniors. A state may be considered less tax-friendly if it:
- Taxes Social Security benefits. As of 2025, a small group of states, including Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont, tax Social Security to some degree.
- Offers limited or no exemptions for pension, 401(k), or IRA income.
- Has high overall income tax rates.
The Complete Picture: It’s Not Just About Income Tax
A low income tax rate doesn’t guarantee a low overall tax burden. To make an informed decision, you must also consider:
- Property Taxes: This is a major factor for homeowners. Some no-income-tax states like Texas and New Hampshire have very high property taxes. Always research a state’s average property tax rate and look for special senior property tax relief programs or “homestead exemptions.”
- Sales Taxes: These taxes on everyday goods and services can significantly impact your cost of living.
- Estate and Inheritance Taxes: While the federal estate tax affects only the very wealthy, about a dozen states have their own estate or inheritance taxes with much lower exemption levels, which can impact the legacy you leave to your heirs.
Disclaimer: This guide provides general information for informational purposes and is not a substitute for professional tax or financial advice. State tax laws are subject to change. Before making any major financial decisions, such as relocating for retirement, please consult with a qualified professional and verify all information with official state government sources.
