Each pension type is subject to federal income tax. However, some states have retirement-friendly laws and these states do not impose a tax on pension income.
Close to retirement and thinking about tax on pension?
Then this post is for you. Because here I am going to provide an in-depth overview of what pensions are not taxable. Moreover, I will also provide a chart of 14 states that do not tax your pension and social security at all. So, stay with me till the end.
What Pensions Are Not Taxable?
Both defined benefit pension plans and defined contribution pension plans are subject to federal income tax. However, the same thing does not apply to state tax. Because there are 14 states that do not tax your pension income.
Under federal law, a pension is considered income. So, your pension income is either fully taxable or partially taxable depending on whether you have contributed after-tax dollars to your pension or not.
But state income tax is different from federal income tax. Moreover, there are 14 states that have relaxed tax laws on pension income tax.
As they either partially tax your pension income or do not tax it at all. Moreover, some do not tax defined benefit pension plans. On the other hand, some states do not tax pension income at all.
So, what states do not tax pensions?
What States Do Not Tax Your Pension Or Social Security?
In this section, I am providing a detailed chart of what states do not tax defined benefit pension plans and defined contribution pension plans or 401k and IRA. For your convenience, I am also adding whether these states tax your social security benefits or not.
| State | Tax on Defined Benefit Pension Plans | Tax on 401k or IRA | Tax On Social Security benefits |
| Texas | No Income tax. So, there is no tax on defined benefit pension plans. | No tax on 401k or IRA. | Social Security benefits are also tax-free. |
| Nevada | As there is no income tax. So, your pension income is also tax-free. | No tax is imposed on 401k or IRA either. | No tax on social security benefits. |
| Florida | Florida also has no income tax. So, pension income is also state income tax-free. | 401k and IRA are also tax-free. | Social security benefits do not have income tax either. |
| Washington | No tax on defined-benefit pensions. | IRA and 401K are completely state-tax-free. | Social security is also state tax-free. |
| Pennsylvania | No tax will be imposed on defined benefits plans. However, state income tax is applicable if you retire early. | IRA and 401k are not taxable if you don’t retire early. | Social security benefits are completely tax-free. |
| Illinois | No tax is imposed on qualified benefit plans, government pension benefits, and military pensions. | IRA and 401k are tax-free too. | Tax-free. |
| Alabama | Qualified benefit plans, government pension benefits, and military pensions are tax-free. | 401k and IRA are taxed. However, from 2023, the first $6,000 from these pension plans will be tax-free. | No tax. |
| Mississippi | No tax will be imposed unless you retire early. | No tax on 401k or IRA if you don’t retire early. | Tax-free. |
| Alaska | No income tax. So, no state tax on pension income. | No tax on IRA or 401k. | No tax. |
| Tennessee | No income tax. So, no tax on pensions. | No Tax. | Tax-free. |
| Wyoming | Wyoming is also income tax-free. So, no tax. | Tax-free. | Tax-free. |
| South Dakota | With no income tax. There is no tax on pensions. | Tax-free | Tax-free. |
| New Hampshire | No income tax. So, no tax on pensions. | Tax-free. | No tax. |
| Hawaii | Tax-free. | IRA and 401k are taxed. | Tax-free. |
Now that we know the answer what states do not tax pensions? So, let’s look at the number of states that do not tax military pensions.
What State Does Not Tax Military Retirement?
There are 38 US states that do impose a tax on military retirement pay. Moreover, 10 US states partially tax military retirement. So, there are only two US states that fully tax military retirement benefits.
Here is a list of states that do not tax military retirement pay
- Texas
- Nevada
- Alabama
- Florida
- Arizona
- Alaska
- Arkansas
- Tennessee
- Connecticut
- Wyoming
- Hawaii
- South Dakota
- Illinois
- New Hampshire
- Nebraska
- Indiana
- Washington
- Wisconsin
- Iowa
- West Virginia
- Kansas
- Utah
- Kentucky
- South Carolina
- Louisiana
- Rhode Island
- Maine
- Pennsylvania
- Massachusetts
- Ohio
- Michigan
- North Dakota
- Minnesota
- North Carolina
- Mississippi
- New York
- Missouri
- New Jersey
Moreover, new state legislations are passed every year to exempt income tax from military retirement pay. So, in near future, there might be no state income tax on military retirement. However, some states have caps on how much the military retirement pay will be tax-free. So, be sure to check your state website to find out.
Now, let’s find out whether you pay taxes on pensions from the state you retired in or the state you’re living in.
Do You Pay Taxes on Pensions From The State You Retired In or The State You’re Living in?
You pay your state income tax to the state you are resident of, not the state you have earned your pension.
According to the Pension Source Tax Act of 1996 (P.L. 104-94)
“No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State.“
So, if you have earned your pension from a state and resident of another state, then you have to pay your pension income tax to the state you are a resident of. For example, if you have earned your pension from New York but are a resident of New Jersey, then you will pay your pension income tax to New Jersey.
As a result, shifting to a new pension tax-free state in retirement might be a good idea. But should you move to a tax-free state in retirement?
Should You Move To A Tax-free State In Retirement?
Yes, if you have fewer retirement savings then you should move to a tax-free state. However, before moving be sure to check the residency requirement of the state, other tax laws, and your current state tax pre-payment laws.
Moving states to save tax on pension income might seem easy. But it’s not as easy as you think. Here are a few things you must consider before moving to a new state in retirement
- First, check the residency requirement of the state you are planning to move to. Because if you are not declared a resident of the state you move to then you have to pay income tax on your pension to your previous state.
- Secondly, check the entire tax picture of the state you are moving in. Because states with no income tax tend to have higher taxes on other things.
- If you are planning to purchase a property in the state you are moving in be sure to check the property tax.
- Make sure that you are fully committed to moving. Otherwise, you might end up visiting your old state every now or then and spending even more than the tax bill on these visits.
- Lastly, be sure to check if there are any tax pre-payment laws in your current state.
In Summary
Paying state taxes on pension income can be a burden for many. However, you might not be fully taxed on pension income if you plan early. So, consult with a tax expert for the best suggestions.
Moreover, please consult with an expert to avoid any unnecessary hassle if you plan to move to a pension tax-free state in retirement.
