In this article, we are going to discuss the 13 states that don’t tax pension income in the US. You can skip our detailed analysis and go directly to the 5 States That Don’t Tax Pension Income in the US.
How Do Americans Feel About Retirement?
Some states in the US don’t have income tax, while a few other states exempt retirement income. Most states in the US avoid taxing Social Security benefits, and there are a few states that tax 401(k) plans and IRA distributions but not pensions. Worker and retiree confidence levels considerably dropped in 2023, and it hasn’t fully recovered so far in 2024, as per the 2024 Retirement Confidence survey by the Employee Benefit Research Institute (EBRI). However, the majority of the people remain optimistic about their retirement prospects as there are positive signs of recovery.
The EBRI report reveals that 68% of workers and 74% of retirees believe that they will have enough capital at their disposal to live comfortably throughout their retirement. For those who have an opposite opinion, inflation is a major reason to blame. Around 31% of workers and 40% of retirees mention inflation as the reason for lack of confidence. In addition, 39% of workers and 27% of retirees feel unconfident due to their lack of savings. The fear of Americans regarding inflation is slightly fading with increased optimism this year. Almost 78% of workers and 72% of retirees remain concerned about inflation affecting their retirement, compared to 86% of workers and 79% of retirees feeling the same in 2023. A few workers and retirees, around 71% and 59%, are expecting a possible recession this year. Americans are anticipating an improved economy and recovery as the Fed is ready to cut rates on September 18. Financial markets anticipate the Fed to initiate its easing cycle with a 25 bps reduction in its benchmark overnight interest rate.
A larger population of Americans believe Social Security to be a source of income in retirement, with 88% of workers and 91% of retirees. Similarly, 35% of workers and 62% of retirees consider Social Security as a major source of income after retirement. Almost half of the US citizens have determined how much money they will need retiring, and 52% of workers and 44% of retirees want to save more. Almost 22% of workers and 33% of retirees believe that they need less than $500,000, while 23% of workers and 21% of retirees estimate they will need between $500,000 and $1 million. However, a third of workers currently have less than $50,000 in savings and investments and 14% of workers have less than $1,000.
Americans have a retirement age of 65 years, but the median retirement age for Americans is actually 62. Retirees on fixed incomes expect to spend their retirement life in states that offer them better retirement plans and impose little to no taxes. Alaska, Florida, Nevada, Texas, South Dakota, North Carolina, and South Carolina are some of the best states to retire for taxes in the US.
According to a report by Hire a Helper, an estimated of nearly 338,000 US citizens moved to a new home in 2023, up from 44% in 2022. The primary motive for their relocation was retirement. Texas tops the position as the leading destination for these moves, as per a report by U-Haul Holding Company. Florida is another top state people moved to in 2023. These states have one thing in common: low cost of living, ideal warm weather, and lots of retirees. However, the key aspect regarding these states is that they don’t tax retirement or pension income.
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The Top Retirement Planning Company
Rowe Price Group, Inc. (NASDAQ:TROW) is one of the leading asset management companies in the US and specializes in offering a wide range of related services to institutions, individuals, and businesses. The company also offers various retirement plans and assistance to the clients. T. Rowe Price Group has over 67% of assets under management in retirement. TROW partners with various policymakers, industry leaders, and stakeholders to enhance the adoption of practical retirement savings laws and rules that benefit retirement savers. The company has over $1.59 trillion in assets under management, as of July 31. T. Rowe Price’s disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research.
Rowe Price Group, Inc. (NASDAQ:TROW) missed the earnings estimates during the second quarter of 2024 by a slight margin. However, TROW continues to improve and follow a growth trajectory compared to 2023. The company posted earnings of $2.26 per share, up by 12% year over year and missing the estimates by $0.02. The revenue came in at $1.73 billion, up from $1.63 billion in Q2 2023. By the end of July 2024, the company had over $1.59 trillion worth of assets under management, up from $1.57 trillion at the end of June. However, the company reported net outflows of $3.7 billion for Q2 2024. Despite expecting continued outflows in the second quarter, the company is optimistic about improvement due to higher sales and reduced redemptions. Here is what the management said during the Q2 2024 earnings call:
“We ended the quarter with just under $1.57 trillion in assets under management and $3.7 billion in net outflows. While market gains continued to support our financial results, I’m pleased to say that we are making steady progress in inflows and investment performance. Our sales pipeline is healthy, redemption pressure is stabilizing, and our associates are driving our strategic initiatives forward. We continue to be on track to substantially reduce net outflows this year. Overall, our investment performance remained solid in the second quarter with two-thirds of our funds beating their peer group one-year medians and over 40% of our funds in the top quartile.
Returns across alternative strategies continued to be strong with alpha generated across the portfolios, primarily due to effective individual credit selection. Jen will discuss our flows and financials in more detail shortly, but I wanted to take a moment to highlight our ETF business. As of June 30, we reached $5.3 billion in assets under management, up from $1.2 billion in June 2023. In the first half of this year, we’ve had $2.4 billion of inflows to our ETFs. We are excited by this growth in our ETFs and that we are attracting diverse investors across wealth management, institutional, direct retail, and investors outside the United States. We expect that the appetite for our ETFs will continue to grow throughout the year as five of our 16 ETFs, including US equity research and blue chip growth have each grown to over $300 million in assets, which is the size eligible for many platforms.”
Rowe Price Group, Inc. has been growing its dividends consistently for the past 38 years. TROW currently pays a dividend of $1.24 per share and has a dividend yield of 4.68%, as of August 31. The company has returned nearly $396 million to shareholders through dividends and share repurchases in the most recent quarter.
TROW was held by 28 hedge funds in Q2 2024, up from 24 in the previous quarter. The total value of these stakes is nearly $500 million. TROW is also part of the best debt-free dividend stocks to buy.
While we acknowledge the potential of TROW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Now, let’s take a look at the 13 states that don’t tax pension income in the US.
Our Methodology
To compile the list of states that don’t tax pension income in the US, we began by shortlisting all the states with no income tax. In addition to these states, we selected the states with income tax that make an exception for retirement income such as 401(k)s, IRAs, and pension distributions, as well as Social Security benefits. We ranked the states that don’t tax pension income in the US based on their combined sales tax rate and property tax rate. The tax data is sourced from the Tax Foundation, updated as of 2024.
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13 States That Don’t Tax Pension Income in the US
13. Illinois
Individual Income Tax Rate: 4.95%
Statewide Sales Tax Rate: 6.25%
Property Tax Rate: 1.95%
Combined State Sales & Property Tax Rate: 8.20%
Illinois is a decent option for retirees looking for a tax-friendly environment. The state has a flat income tax rate of 4.95% exempted on retirement income, including social security, pensions, and distributions. On the other hand, Illinois has a relatively high sales tax and property tax. Illinois ranks among the 13 states that don’t tax pension income in the US.
12. Texas
Individual Income Tax Rate: 0%
Statewide Sales Tax Rate: 6.25%
Property Tax Rate: 1.47%
Combined State Sales & Property Tax Rate: 7.72%
Texas is famous for zero income tax and also supports retirees with its tax-friendly nature. Similar to Illinois, Texas has a high sales tax rate of 6.25% and a property tax rate of 1.47%. Overall, Texas is one of the best states that don’t tax pension income in the US.
11. Mississippi
Individual Income Tax Rate: 4.70%
Statewide Sales Tax Rate: 7%
Property Tax Rate: 0.70%
Combined State Sales & Property Tax Rate: 7.70%
Mississippi is a great state for retirees as it exempts all retirement income from taxation. The state has one of the lowest property taxes, however, sales tax is quite high. Mississippi ranks 11th among the states that don’t tax pension income in the US.
10. Tennessee
Individual Income Tax Rate: 0%
Statewide Sales Tax Rate: 7%
Property Tax Rate: 0.48%
Combined State Sales & Property Tax Rate: 7.48%
One of the best states to retire, Tennessee does not impose an income tax, while property tax is also quite low at around 0.48%. The cost of living in Tennessee is lower than the national average, helping to balance expenses. Tennessee is also one of those states that don’t tax pension income in the US.
9. Iowa
Individual Income Tax Rate: 5.70%
Statewide Sales Tax Rate: 6%
Property Tax Rate: 1.40%
Combined State Sales & Property Tax Rate: 7.40%
Ranking 9th on our list of the states that don’t tax pension income is Iowa. The state does not impose income taxes on Social Security and does not tax retirement income for individuals who are 55 years of age or older. The exemption also applies to disabled and surviving spouses or other survivors having an insurable interest as an individual who qualified for the exclusion in the tax year based on age or disability.
8. Nevada
Individual Income Tax Rate: 0%
Statewide Sales Tax Rate: 6.85%
Property Tax Rate: 0.44%
Combined State Sales & Property Tax Rate: 7.29%
Nevada has zero income tax which means retirees can enjoy their pension. Property taxes are low, though sales tax is higher than average. Notably, Nevada boasts one of the lowest average retirement ages in the US, at 63 years, and ranks among the states that don’t tax pension income.
7. Washington
Individual Income Tax Rate: 0%
Statewide Sales Tax Rate: 6.50%
Property Tax Rate: 0.76%
Combined State Sales & Property Tax Rate: 7.26%
Washington is among those states with zero income tax. The property tax rates in Washington are slightly below the national average and the state relies heavily on its sales tax rate for revenue. Washington ranks seventh among the states that don’t tax pension income in the US.
6. Pennsylvania
Individual Income Tax Rate: 3.07%
Statewide Sales Tax Rate: 6%
Property Tax Rate: 1.26%
Combined State Sales & Property Tax Rate: 7.26%
Pennsylvania is a prominent state as it exempts social security and payments from retirement accounts from taxes. Retirees aged 60 and over enjoy exemption from taxes on pension income as well.
5. Florida
Individual Income Tax Rate: 0%
Statewide Sales Tax Rate: 6%
Property Tax Rate: 0.71%
Combined State Sales & Property Tax Rate: 6.71%
Florida is one of the states with zero income tax and it also has a low property tax rate of 0.71%. Statewide sales tax rests at 6%, potentially reaching 8.25% with local additions. Florida ranks fifth among the states that don’t tax pension income in the US.
4. South Dakota
Individual Income Tax Rate: 0%
Statewide Sales Tax Rate: 4.20%
Property Tax Rate: 1.01%
Combined State Sales & Property Tax Rate: 5.21%
South Dakota is another prominent retiree haven with no income taxes and a property tax of just over 1%. Senior citizens with a minimum age of 70 years can benefit from the Homestead Exemption Program, which allows delaying property tax payment until the property is sold, with accrued taxes subject to a 4% annual interest rate. Other requirements to be part of the plan include residing in the state for a minimum of 5 years or owning a house for at least 3 years.
3. Wyoming
Individual Income Tax Rate: 0%
Statewide Sales Tax Rate: 4%
Property Tax Rate: 0.55%
Combined State Sales & Property Tax Rate: 4.55%
Wyoming is one of the best states that don’t tax any form of income. Retirees enjoy tax-free social security benefits and other retirement incomes. With low sales and property taxes, it’s a haven for retirees. Wyoming ranks third among the 13 states that don’t tax pension income in the US.
2. New Hampshire
Individual Income Tax Rate: 3%
Statewide Sales Tax Rate: 0%
Property Tax Rate: 1.61%
Combined State Sales & Property Tax Rate: 1.61%
New Hampshire has a flat 3% individual income tax rate levied only on interest and dividends income. The state doesn’t impose income taxes on social security and other retirement income. New Hampshire does not have a sales tax and charges a 1.61% tax on property. New Hampshire is one of the best states that don’t tax pension income in the US.
1. Alaska
Individual Income Tax Rate: 0%
Statewide Sales Tax Rate: 0%
Property Tax Rate: 1.07%
Combined State Sales & Property Tax Rate: 1.07%
Alaska ranks first among the states that don’t tax pension income in the US. The state does not have an income tax, making it a prime location for retirees. The only negative thing about Alaska is its harsh climate and slightly higher living costs.
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Disclosure: None. This article is originally published on Insider Monkey.