Two retirees with identical pensions and identical savings can owe wildly different tax bills for one reason alone: the state they live in. The federal treatment of pensions, annuities, and traditional retirement-account withdrawals is the same everywhere, but state rules range from taxing none of that income to taxing most of it. For anyone weighing where to spend retirement, the difference can amount to thousands of dollars a year.
The States That Tax No Retirement Income
Nine states impose no broad personal income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In those states, pensions, 401(k) and IRA withdrawals, and Social Security benefits are free of state income tax because there is no such tax to apply. As AARP notes, a small number of income-tax states go a step further and specifically exempt most retirement income even though they tax wages, with Illinois, Mississippi, and Pennsylvania among the long-standing examples.
Where Withdrawals Still Get Taxed
Most states do tax at least part of retirement income, but rarely in a uniform way. Many carve out generous exemptions for pension income, offer an age-based deduction, or shield a set amount of retirement-plan withdrawals before tax applies. A traditional IRA or 401(k) distribution that is fully taxable at the federal level may be partly or wholly exempt in one state and fully taxed in a neighbor. Some states draw a line between a public pension and a private one, exempting government and military retirement pay in full while taxing a 401(k) draw, so two households with the same income can be treated differently based on where the money originated. The taxation of Social Security benefits has also narrowed over time. As AARP notes, only a small and shrinking group of states still tax any portion of Social Security, and several of those grant exemptions that rise with age or fall away below set income levels.
The State a Retiree Leaves Cannot Follow the Pension
Residency, not the state where a pension was earned, controls who gets to tax it. A federal law enacted in 1996 bars a state from taxing the retirement income of someone who no longer lives there, which ended the practice of a former employer’s state reaching across the border to tax a pension after a worker retired and moved away. A career spent working in a high-tax state therefore does not lock a retiree into that state’s tax on pension checks once the person establishes residency elsewhere. Establishing that new residency is a factual test, turning on where a retiree actually lives, votes, registers vehicles, and spends most of the year, and a state reluctant to lose the revenue can challenge a move that looks like a change on paper only.
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Why the Federal Bill Stays the Same
State treatment does not change what the IRS collects. A distribution from a traditional retirement account is generally taxed as ordinary income federally, and the agency’s guidance on pensions and annuities explains that the taxable share depends on whether contributions were made with pre-tax or after-tax dollars, not on the taxpayer’s state. Roth withdrawals that meet the rules come out tax-free at both levels. The state layer sits on top of that federal result, which is why moving can change a total tax bill even when the federal portion is fixed.
Withdrawals and Conversions Can Cross State Lines
Timing a large withdrawal around a move changes which state gets to tax it. A retiree who takes a big traditional-IRA distribution or converts to a Roth while still a resident of a high-tax state generally owes that state’s tax on the income, even if the plan was to relocate weeks later. Waiting until residency has shifted to a no-income-tax state can remove the state layer from that same distribution entirely. Because a Roth conversion is taxed in the year it happens, the sequence of the conversion and the move can swing the state bill on a six-figure transaction by thousands of dollars, while the federal treatment stays identical either way.
What a Move Really Changes
A low-tax or no-tax state can look decisive on retirement income alone, but the full picture includes property taxes, sales taxes, estate or inheritance taxes, and the cost of living. A state with no income tax may lean harder on property or sales taxes to make up the revenue, which can erode the savings for a homeowner. The reliable step for a retiree comparing locations is to look past the headline of no income tax and total the actual taxes a specific household would owe, since the mix that favors one retiree can work against another with a different balance of pension, withdrawals, and property.
This article was produced with AI assistance and reviewed by The Financial Wire editorial team.
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Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
