Don't Let State Taxes Derail Your Retirement: What You Need to Know

Taxes in retirement may surprise retirees

With policy changes creating more access to retirement savings plans, more workers are saving for the future. According to the Investment Company Institute, nearly 75% of households own some form of tax-advantaged retirement account such as a 401(k) or IRA. In fact, IRAs alone represent 39% of total retirement assets, largely driven by rollovers from workplace plans.

Retirement assets have surged

Since the emergence of 401(k) plans in the early 1980s, retirement savings accounts have grown tremendously. Assets in IRAs and defined contribution plans have grown to more than $33 trillion in 2026 from $5.6 trillion in 2000.

The good news is that, overall, many individuals have leveraged these savings accounts to prepare for retirement.

One of the challenges is that most of these savings are held in pre-tax accounts, and the assets will be taxed when distributed in retirement. Although contributions to tax-free Roth IRA accounts have grown in recent years, they still make up a minority of overall retirement assets.

Investors may overlook the impact of local taxes

While many retirees are focused on the impact of retirement account distributions on their federal 1040 tax form, some may not know how their particular state treats these distributions from a tax perspective.

Some states tax Social Security, pensions and distributions from a 401(k) or IRA.¹ There are eight states that tax Social Security benefits.

* 2025 figures. Income thresholds have not been released for 2026 yet.

Retirement income is not taxed in 13 states. This includes nine states that do not currently tax income:

Alaska
Florida
Nevada
New Hampshire
South Dakota
Texas
Tennessee
Washington
Wyoming

and four states that tax income but do not tax 401(k) or IRA distributions:

Illinois
Iowa
Mississippi
Pennsylvania

Alabama and Hawaii do not tax retirement pension income but do include IRA or 401(k) distributions as income for state taxes.

It is important to note that federal taxes still apply, and that remaining states taxation varies widely. There are other state taxes that could be overlooked, such as property, sales and estate taxes that may weigh on savings. Individuals may want to consider these factors when choosing a location to retire.

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Endnotes

¹State taxes may vary by income and filing status

Sources

“US Retirement Market.” ICI. March 2026.
“The Role of IRAs in US Households’ Saving for Retirement, 2024.” ICI. March 2025.
Tax Foundation. January 2025.

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