What Are the States That Don’t Tax Pensions?
Your retirement location significantly affects your finances. Explore how different state tax approaches to retirement income can shape your savings.
State tax laws are a significant variable in financial planning for retirement. The approach to taxing retirement income differs substantially from one state to another, creating a complex landscape for retirees. Some states impose a broad income tax that includes pensions and other retirement funds, while others offer partial or complete exemptions.
States With No State Income Tax
The most straightforward way to avoid state taxes on a pension is to reside in a state that does not levy a personal income tax. As of 2025, eight states fall into this category: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Because these states have no general income tax, all forms of retirement income, including pensions, distributions from 401(k)s, and withdrawals from IRAs, are not taxed at the state level.
New Hampshire fully repealed its tax on interest and dividend income as of 2025. Washington also lacks a general income tax but does impose a tax on certain high-value capital gains, which could affect some retirees. While these states do not tax income, they generate revenue through other means, such as property or sales taxes, which can be higher than in states with an income tax.
States That Fully Exempt Pension Income
Beyond the states with no income tax, several others that do have a state income tax still offer a complete exemption for pension income. These states include Illinois, Iowa, Mississippi, and Pennsylvania, which do not tax distributions from pension plans, though some have age requirements. Similarly, Alabama and Hawaii exempt most private and all public pension income but may tax other forms of retirement distributions.
The exemption might apply to payments from private employer-sponsored pension plans as well as government pensions, such as those for federal civil service employees, military personnel, and state or local government workers. In these states, a retiree receiving regular payments from a former employer’s pension fund would not owe any state income tax on that specific income stream.
Tax Treatment of Other Retirement Accounts
For retirees living in states that exempt pensions but still levy an income tax, the treatment of other retirement accounts is a major consideration. In Illinois, Mississippi, and Pennsylvania, the tax benefits extend beyond pensions, as these states also fully exempt distributions from 401(k) plans and traditional IRAs. Iowa also provides a full exemption for income from these accounts for residents 55 and older.
The situation is different in Alabama and Hawaii. For taxpayers aged 65 and older, Alabama provides an exemption on the first $6,000 of income from 401(k)s and traditional IRAs; any distributions beyond this amount are taxed. Hawaii, however, taxes distributions from 401(k)s and traditional IRAs as regular income.
Social Security benefits are not taxed in any of these states—Alabama, Hawaii, Illinois, Iowa, Mississippi, and Pennsylvania. Qualified Roth IRA distributions that are considered qualified by federal standards are also not taxed by these states, as the withdrawals are federally tax-free.
Establishing Residency for Tax Purposes
Moving to a state with favorable tax laws requires more than simply changing your address; it involves legally establishing a new “domicile.” A domicile is your true, fixed, permanent home, and the place to which you intend to return whenever you are away. States where you previously lived, especially high-tax states, may challenge your move to audit whether you have truly severed ties and are no longer subject to their taxes.
To successfully establish a new domicile for tax purposes, you must demonstrate clear intent through a series of concrete actions. These include purchasing or leasing a home, registering your vehicles, obtaining a new driver’s license, registering to vote, and opening local bank accounts. You must also update your address with financial institutions and government agencies like the Social Security Administration and the IRS.
Many states use a “day count,” often referred to as the 183-day rule, as a primary factor in determining residency. Spending more than half the year in the new state provides strong evidence of your intent to make it your permanent home. Keeping detailed records, such as travel receipts and calendars, can be important to substantiate your physical presence in the new state and absence from the old one, particularly during the first year after a move.