This article takes a look at the 5 states that don’t tax your retirement income. If you wish to check out our detailed analysis on choosing your next retirement destination, you may go to 14 States That Don’t Tax Your Retirement Income.
5. Iowa
Insider Monkey Score: 13
Tax Friendliness: Moderately Tax-friendly
Cost of Living Index: 90.3
Next on our list of states that don’t tax your retirement income is the state of Iowa. The state of Iowa is the only moderately tax-friendly state on our list. Seniors who are aged 55 and above are eligible for tax exemption on their retirement income, which includes distributions from a 401(k), IRA, pension, annuity, and other assets. The sales tax rate in this state is 6%, and 18 counties collect a combined statewide rate of 7%. However, there are certain exemptions that seniors can avail such as on food, prescription drugs, and some types of non-prescription medication as well. Nevertheless, the cost of living for this state is pretty low, around 9.7% lower than the national average. This has helped it earn a spot in our top five.
4. Illinois
Insider Monkey Score: 13
Tax Friendliness: Tax-friendly
Cost of Living Index: 92.1
Illinois is another tax-friendly state that seniors can consider for their retirement years. The state has a flat income tax rate of 4.95%, but seniors don’t have to pay this on their retirement income. This income includes social security payments, pension payments, and distributions from plans such as 401(k)s and IRAs. The state isn’t entirely tax-free, however, and is notorious for having some of the highest sales and property taxes in the country. The average effective property tax rate is an estimated 2.2%, which is the second-highest rate in the country. As a senior, buying a property in this state means paying bulky taxes. There is a specific homestead exemption that seniors can avail of called the Senior Citizen Homestead Exemption. This program allows individuals who are 65 or older who meet certain requirements to defer all or part of the real estate taxes and special assessments (up to a certain limit) on their principal residences.
3. Tennessee
Insider Monkey Score: 14
Tax Friendliness: Tax-friendly
Cost of Living Index: 90.3
Even though you will pay federal taxes wherever you live, Tennessee does not have an income tax on its own. This means social security benefits and income from retirement accounts are not taxed at the state level. The state also boasts low property taxes, making it tax-friendly for retirees. However, sales tax can hit Tennessee’s residents quite a bit hard. The overall average state and local sales tax rate can be as high as 9.61%, whereas the set sales tax rate is 7%. The cost of living can offset some of this since living expenses are 9.7% lower than the national average.
2. Alabama
Insider Monkey Score: 16
Tax Friendliness: Tax-friendly
Cost of Living Index: 88.3
Alabama doesn’t completely exempt retirement income from taxes, so what brings it into our list of top five states that don’t tax retirement income? It’s a surprisingly low cost of living. While the state fully taxes withdrawals from retirement accounts, living expenses in the state are 11.7% lower than the national average. Income from retirement accounts is taxed at regular income rate, with this state income tax rate ranging between 2% to 5%.
1. Mississippi
Insider Monkey Score: 18
Tax Friendliness: Very Tax-friendly
Cost of Living Index: 86.3
In the state of Mississippi, all forms of retirement income are exempt from taxation. The state is home to warm winters and the cost of living is 13.7% lower than the national average. The state even has low property taxes and moderate sales tax. There is a homestead exemption available that seniors can avail.
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