This article takes a look at the 15 states that do not tax social security or retirement income. If you wish to skip our detailed analysis on social security gaps, investment strategies, and tax-friendly states, you may go to 5 States That Do Not Tax Social Security or Retirement Income.
Social Security Gaps, Investment Strategies, and Tax-Friendly States
According to the BlackRock Read on Retirement™ survey by BlackRock, Inc. (NYSE:BLK), only 56% of workplace savers in 2023 believe they are on track with their retirement savings, down from 68% in 2021. Market volatility, high levels of inflation, recessionary fears, and a lack of retirement income are eroding confidence regarding the retirement years. As a result, 29% of workers now plan to retire later than originally planned.
Stock and bond price plummets in 2022 haven’t helped improve this confidence, with many retirees witnessing significant erosion in the value of their portfolios. Even though market conditions have been improving, potential savers still have to make up for the losses incurred. In addition to hoping to make up for loss, 93% of workplace savers in the BlackRock, Inc. (NYSE:BLK) survey are also looking forward to the idea of “a well-diversified fund where you can opt-in to have a portion automatically converted to guaranteed income as you near retirement”. The question is, is that possible?
According to The Charles Schwab Corporation (NYSE:SCHW), the right investment strategy can help diversify risk and ensure a stable income is built into your retirement plans. Also known as fixed-income investments, products like bonds allow individuals to hedge against market volatility. CNBC states that bonds are “all the rage” these days, and since interest rates have been witnessing a dramatic shift, investors are being advised to embrace the trend. Since 2022, interest rates have been increasing with the yield-to-maturity on the benchmark U.S. 10-year Treasury now nearing 5%, the highest since the Great Financial Crisis in 2007.
This shift presents an exciting opportunity for bond investors as real yields, adjusted for inflation, are approaching a level of 2.5%, signaling a positive trend in bond market returns. In short, CNBC recommends adopting a balanced approach for investors to optimize yield potential. This can be done by increasing exposure to long-term bonds and incorporating short-term bonds as well. BlackRock, Inc. (NYSE:BLK) seems to agree, signaling that shorter bonds might be a safer bet for investors.
As such, retirees depend on fixed-income investments such as bonds because their sources of income are limited. As of 2023, 67 million Americans have been receiving a social security benefit monthly, amounting to a total of $1.4 trillion. A significant portion of these people are fully dependent on this income to make it through the month. Despite the average 2023 Social Security benefit standing at $1,781.63, retirees, on average, are estimated to spend $4,345 per month, according to the Bureau of Labor Statistics.
This gap between the benefits received and actual spend required implies that many seniors are living in a hand-to-mouth situation. According to the Organization for Economic Co-operation and Development, 23% of Americans aged 65 or above are said to be living below the poverty line. Since the future of social security funds is already shaky, it’s not the most economical move to tweak it right now. However, what seniors can do to make the most of their Social Security benefits is to opt for states that don’t tax their Social Security benefits or retirement income.
According to The Charles Schwab Corporation (NYSE:SCHW), your tax liability is heavily dependent on where you live. As such, there are a couple of states in the US where there is no income tax. Retirees can live in these states and not pay taxes on social security. A few of them even boast a cost of living that is below the national average, making them the best states to retire in financially.
“Whether you’re a retiree, a remote worker, or just looking for a change of scenery, the idea of pulling up stakes for purportedly greener pastures isn’t that unusual these days. However, the tax implications can be profound, so it’s smart to take a hard look before you break out the packing tape.”
– Hayden Adams, CPA, CFP®, director of tax and financial planning at the The Charles Schwab Corporation (NYSE:SCHW) Center for Financial Research.
On that note, let’s look at all the states that do not tax social security or retirement income.
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Methodology
To compile the list of states that do not tax social security or retirement income, we began by listing out all the states. Next, we filtered out states with no state income tax. We also highlighted states that do not tax social security or retirement income. 13 states do not tax these incomes. We also picked out two states that have only a small tax levied on social security or retirement income. Next, we scored them on their tax-friendliness, cost-of-living index, and climate.
The cost of living index has been sourced from MERIC. A cost of living index of 98 means the cost of living is 2% lower than the national average. To assess tax-friendliness, we utilized Smart Asset rankings. Those deemed “very tax-friendly” received a score of 5, “tax-friendly” states earned 4 marks, “moderately tax-friendly” received 3, and “tax-unfriendly” garnered 2. In addition, each state underwent a subjective climate assessment, rated on a scale of 1 to 5.
For places with the same scores, tie-breaking has been done based on the cost of living index, with the state with a lower index ranking higher on our list.
Please note: Starting next year, Missouri will also be making it to our list as it will no longer tax social security benefits and public pension payments.
Here are the States That Do Not Tax Social Security or Retirement Income:
15. Alaska
Insider Monkey Score: 9
Tax Friendliness: Very Tax Friendly
Cost of Living Index: 126.4
Besides grizzly bears and chilly winters, Alaska is also known for not taxing social security or retirement income. The state doesn’t have an income tax, which is why seniors can enjoy all of their retirement income tax-free at the state level. Moreover, there is no sales tax, and no estate or inheritance tax either but the cost of living is 26.4% higher than the national average.
14. Washington
Insider Monkey Score: 10
Tax Friendliness: Tax Friendly
Cost of Living Index: 115.7
Washington is another one of the states that don’t tax social security or retirement income. Similar to Alaska, the state doesn’t have an income tax. Retirees can enjoy all of their income tax-free at state level. However, they would need every bit of it considering the cost of living is 15.7% higher than the national average.
13. New Hampshire
Insider Monkey Score: 11
Tax Friendliness: Tax Friendly
Cost of Living Index: 115.6
New Hampshire is considered to be tax-friendly towards retirees. It is one of the states that don’t tax retirement income or social security. The state doesn’t have any sales tax, estate tax, or inheritance tax either. However, the state has a 5% tax on dividends and interests that is due to be phased out in January 2027. On the other hand, property taxes are some of the highest in the country. Smart Asset reports that a typical homeowner spends more than $6,097 in property taxes annually. The cost of living is also 15.6% higher than the national average.
12. Nevada
Insider Monkey Score: 12
Tax Friendliness: Very Tax Friendly
Cost of Living Index: 101.1
Nevada is one of the many states that are tax-friendly for Social Security. Since there is no income tax in Nevada, seniors receive all of their social security and retirement income tax-free at the state level. The state also boasts relatively low property taxes. The cost of living is a bit higher than the national average (1.1% higher).
11. Pennsylvania
Insider Monkey Score: 13
Tax Friendliness: Tax Friendly
Cost of Living Index: 94.8
Another state that doesn’t tax social security or retirement income is the state of Pennsylvania. Social Security retirement benefits and income from retirement accounts aren’t taxed at the state level. Seniors aged 60 or older do not have to pay any tax on pension income either. The cost of living in this state is 5.2% lower than the national average.
10. Florida
Insider Monkey Score: 14
Tax Friendliness: Very Tax Friendly
Cost of Living Index: 101
The Sunshine State of Florida is one of the most tax-friendly states to retire to. The state doesn’t tax social security or retirement income as it doesn’t have a state income tax. In addition, it doesn’t have any estate or inheritance tax either. The cost of living is 1% higher than the national average.
9. Wyoming
Insider Monkey Score: 15
Tax Friendliness: Very Tax Friendly
Cost of Living Index: 93.2
One of the best states to retire in financially is Wyoming. Retirees can stretch their retirement savings further in this state considering that it is very tax-friendly and enjoys a low cost of living as well. The state doesn’t tax social security or retirement income as it doesn’t have an income tax at all. The cost of living in the state is 6.8% lower than the national average.
8. Texas
Insider Monkey Score: 15
Tax Friendliness: Tax Friendly
Cost of Living Index: 93
Another state that doesn’t tax social security or retirement income is Texas. Texas isn’t just tax-friendly but is also revered for its affordable cost of living. The state doesn’t have an income tax, which is why all sorts of retirement income as well as social security go un-taxed in the state.
7. Illinois
Insider Monkey Score: 16
Tax Friendliness: Tax Friendly
Cost of Living Index: 91.8
Illinois does not tax social security benefits, and it is also one of the states that doesn’t tax 401k retirement income. All other forms of retirement income, including pensions, are not taxed in this state. The cost of living is also 8.2% lower than the national average. One drawback of living in this state is that it has some of the highest property and sales taxes in the country.
6. Alabama
Insider Monkey Score: 16
Tax Friendliness: Tax Friendly
Cost of Living Index: 88.2
Alabama is one of the states that do not tax Social Security retirement benefits. Public and private pension income isn’t taxed in the state either. Retirement income, such as that coming from 401(k) plans and IRAs, are taxable. However, Kiplinger notes that the first $6,000 of such income is tax-exempt for individuals aged 65 or older. Retirement income is taxed at a rate ranging from 2% to 5%. Moreover, the cost of living is 11.8% lower than the national average, making it one of the best states to retire on social security.
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Disclosure: none. 15 States That Do Not Tax Social Security or Retirement Income is originally published on Insider Monkey.