Though it is one of the best sources of retirement income, getting a pension is hard; if you’re lucky enough to get one, it’s crucial to make the most of it during your retirement. Reducing the amount of taxes you have to pay during retirement is a simple way to boost your savings and enjoy your golden years without worrying about money.
While you still have to deal with federal income tax, you won’t have to pay additional taxes on your pension in the following states:
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Pensions: Private and public pensions, including those for workers enrolled in the Alabama Retirement System, are not taxed by the state.
Other Retirement Accounts: Due to Alabama’s state taxes, anything that’s taken out of another kind of retirement account will be taxed as regular income.
Social Security: Luckily, your Social Security benefits will not be taxed.
Income Tax: Alabama’s income tax rate ranges from 2% to 5%. Thanks to the state constitution, these rates cannot be increased. The exact rate you’ll be charged depends on your filing status and your amount of taxable income.
Retirement Friendly?: Overall, Alabama is a good state to retire in. Not only can you enjoy warm weather and that famous Southern hospitality, but you can also enjoy some major tax benefits and a relatively low cost of living.
Pensions: The state of Alaska does not tax pensions.
Social Security: Your Social Security benefits won’t be taxed, either.
Income Tax: Though you’ll still have to pay federal income tax, Alaska is one of nine states that does not have a state income tax.
Retirement Friendly?: As long as you can brave the long and cold winters, Alaska is very retirement-friendly. In addition to tax benefits, you may even be eligible for an annual payout from the Alaska Permanent Fund just for living there.
Pensions: Pensions are not taxed by the Sunshine State.
Other Retirement Accounts: Other forms of retirement income also aren’t subject to tax.
Social Security: Additionally, you can get tax-free Social Security benefits.
Income Tax: Florida does not charge personal income tax.
Retirement Friendly?: With a forgiving tax system and warm climate, Florida has a long-standing reputation as a retirement haven.
Keep in mind that you’ll have to prepare for wild weather and higher insurance costs.
However, there are plenty of other retirees, so many services are catered to your demographic and you have countless opportunities to meet people in the same stage of life.
Pensions: Public pensions are not taxed in Hawaii. Pensions from a private employer can be taxed if you contributed to the plan.
Other Retirement Accounts: Other sources of retirement income, including distributions from your 401(k) and IRA, will be subject to income tax.
Social Security: Like most other states, Hawaii does not tax Social Security benefits.
Income Tax: In Hawaii, the lowest income tax rate is only 1.4%, but the highest rate is 11% (for individuals who earn more than $200,000 in taxable income or $400,000 for joint filers).
What’s more, the state Senate recently passed a bill that would increase the tax rate for high earners to 16%, which would be the highest rate in the country if it became law.
Retirement Friendly?: Retiring in Hawaii is like a double-edged sword: it is literally an island paradise with a great tax system, but it also has the highest cost of living in the country. As long as your budget can handle those expenses, it’s one of the better states for retirees.
Pensions: Public and private pensions are tax-exempt in Illinois, including the pensions of retired Illinois state employees.
Other Retirement Accounts: Illinois also doesn’t tax distributions from IRAs and qualifying 401(k) accounts.
Social Security: Social Security benefits are exempt from state taxes, too.
Income Tax: Illinois charges a flat rate of 4.95% on income tax.
Retirement Friendly?: Though retirement income is not taxable, Illinois is widely considered to be one of the least tax-friendly states in the U.S.
It has high property, sales, and estate taxes, all of which can put a sizable dent in your retirement fund. If you’re prepared for these other taxes, though, you can enjoy all of your retirement income tax-free in Illinois.
Pensions: As long as it can be defined as retirement income, Mississippi won’t tax your pension. However, if you make any early withdrawals from your pension, it doesn’t count as retirement income and will be subject to the state income tax.
Other Retirement Accounts: Again, as long as you don’t make early withdrawals, funds from your 401(k) or IRA won’t be taxed either.
Social Security: You also don’t have to pay taxes on your Social Security benefits.
Income Tax: Mississippi’s rates range from 3% on $3,001 to $5,000, 4% on $5,001 to $10,000, and 5% on more than $10,000 of taxable income. The 3% rate will be phased out by 2022, with potential plans to eliminate the income tax entirely by 2030.
Retirement Friendly?: Despite its relatively high sales tax, Mississippi is a tax-friendly state overall. In addition to tax-free retirement income, property taxes are low and there are no taxes imposed on estates or inheritances. You can also take advantage of the warm weather, a slower pace of life, and the highly accessible great outdoors.
Pensions: In Nevada, pensions are not subject to any state taxes.
Other Retirement Accounts: Nevada also won’t tax distributions from your other retirement accounts.
Social Security: Additionally, your Social Security benefits won’t be taxed.
Income Tax: Nevada does not charge any personal, business, or corporate income taxes.
Retirement Friendly?: In terms of finances, Nevada is a great option for retirees. With no income tax whatsoever and a relatively low cost of living, all of your distributions and benefits can go a long way in the Silver State.
Pensions: Due to the state’s income tax laws, pensions are not taxed in New Hampshire.
Other Retirement Accounts: Distributions from your other retirement accounts will come to you tax-free, too.
Social Security: Your Social Security benefits won’t be subject to any state taxes either.
Retirement Friendly?: As long as you can handle cold New England winters, New Hampshire is a retirement-friendly state, as there also isn’t any sales tax.
Pensions: Federal, state, and local pensions are not taxable in New York, but private pensions are. Once you are at least 59 ½ years old for an entire tax year, up to $20,000 of your pension (assuming it qualifies) can be tax-exempt.
Other Retirement Accounts: Distributions from 401(k)s and IRAs are taxed similarly. Upon reaching 59 ½ years of age, the first $20,000 of your distributions are exempt from taxation. However, the $20,000 exemption applies to all sources of your retirement income, including income from your pension and any other retirement accounts.
Social Security: Your Social Security benefits, at least, are exempt from taxes.
Income Tax: New York state uses progressive tax brackets, ranging from 4% (on taxable income up to $8,500) to 8.82% (on income over $1,077,550). For all brackets above 4%, you will owe a set amount, and then get taxed on any of your income above the minimum level in the bracket.
Retirement Friendly?: Because of its tax system and high cost of living, New York isn’t the best state for retirees. In fact, it’s largely thought to be one of the worst states to retire in. To make retirement worthwhile, you’ll need a large nest egg and deep love of the Empire State.
Pensions: Pensions are not subject to Pennsylvania state taxes unless you make withdrawals before reaching 59 ½ years of age.
Other Retirement Accounts: The same applies to distributions from other retirement accounts — unless you make early withdrawals, your income won’t be taxed.
Social Security: Social Security benefits can also be enjoyed tax-free.
Income Tax: A flat 3.07% is the income tax rate in Pennsylvania. Depending on where you live, you may be charged additional income taxes by the school district or local government.
Retirement Friendly?: State tax benefits aside, Pennsylvania is a solid option for retirees. With beautiful scenery, rich historical sites, and close proximity to both natural and cultural attractions, you can put all of your retirement income to good use.
Pensions: South Dakota does not impose taxes on pension income.
Other Retirement Accounts: 401(k) and IRA distributions won’t be subject to taxes.
Social Security: You can enjoy tax-free Social Security benefits.
Income Tax: There is no personal income tax in South Dakota.
Retirement Friendly?: South Dakota is another retirement haven, particularly when it comes to finances. Living on a fixed income is far easier in an affordable place that has such valuable tax benefits. The winters can be long and cold, but residents have a reputation of being warm, welcoming, and friendly.
Pensions: Pensions are not taxed by the Volunteer State.
Other Retirement Accounts: Similarly, distributions from your other retirement accounts won’t be taxed.
Social Security: Tennessee won’t tax your Social Security benefits either.
Income Tax: Tennessee no longer charges any income tax.
Retirement Friendly?: Tennessee is a smart option if you’re planning to retire on a budget. The Volunteer State is tax-friendly, and its metropolitan areas provide many big-city perks and amenities without a hefty price tag.
Pensions: You can enjoy tax-free pension income if you live in Texas.
Other Retirement Accounts: Distributions from your other retirement accounts won’t be taxed either.
Social Security: Your Social Security benefits are also tax-exempt.
Income Tax: There is no income tax in Texas, and, due to the state constitution, the state needs voter approval to impose any income tax in the future.
Retirement Friendly?: The Lone Star State is quickly gaining a reputation as one of the most retirement-friendly states in the U.S. Texas’ state taxes are a major draw for retirees, but the benefits don’t stop there. You can also enjoy the warm weather, friendly locals, and a low cost of living in both big cities and the countryside.
Pensions: Pensions are not taxed in the state of Washington.
Other Retirement Accounts: Neither are distributions from other retirement accounts.
Social Security: Your Social Security benefits won’t be subject to tax either.
Income Tax: There is no income tax in Washington state.
Retirement Friendly?: Despite its lack of income tax, Washington may not be the best choice for retirees because of its dreary winters and high cost of living. However, if you enjoy rainy weather and can afford it, you can enjoy beautiful natural scenery in both rural and urban areas.
Pensions: Wyoming does not tax public or private pensions.
Other Retirement Accounts: You won’t get taxed on distributions from other retirement accounts.
Social Security: You also won’t see any taxes on your Social Security benefits.
Income Tax: Wyoming does not charge any income tax.
Retirement Friendly?: Due to Wyoming’s taxes and affordability, it is an incredibly retirement-friendly state. Further, as long as you don’t mind the cold, its natural landscape and outdoor recreation are second to none.
Perhaps the only thing more important than knowing when you will retire is knowing where you will spend your retirement. Where you retire will have a major impact on your finances, but it will also affect your happiness during retirement.
Be sure to settle on a state that feels comfortable to you, but that also allows you to make the most of your retirement income.
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