State taxation of retirement income varies significantly depending on the source of funds—Social Security, pensions, or 401(k)/IRA withdrawals. By 2026, the trend has moved toward greater exemptions as states compete to attract and retain retirees.

State Retirement Taxation: A Strategic Outline

The “Nine No-Income-Tax” States

  • These states do not levy a personal income tax on any source, including Social Security, pensions, or 401(k) distributions.
  • The List: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
  • 2026 Update: New Hampshire has officially completed the repeal of its interest and dividends tax as of January 1, 2025, making it a truly “no-income-tax” state for the 2026 tax year.
  • Important Caveat: States without income tax often rely on higher sales taxes (e.g., Tennessee) or property taxes (e.g., Texas and New Hampshire) to fund services.

The “Pension Paradises” (Income Tax but No Retirement Tax)

  • These states have a state income tax on wages but fully exempt most or all forms of retirement income.
  • Illinois & Pennsylvania: Both states exempt 100% of qualified pension income, Social Security, and distributions from 401(k) and IRA accounts.
  • Mississippi: Provides a full exemption on all qualified retirement income, though the state is currently phasing down its overall income tax rate toward 3% by 2030.
  • Iowa: As of early 2026, Iowa continues its total exemption for retirement income for residents age 55 and older.
  • Michigan: Following legislation passed in 2023, Michigan has completed the phase-out of its “pension tax” by the 2026 tax year, significantly expanding exemptions for retirees.

Social Security Taxation in 2026

  • 42 States + D.C.: Do not tax Social Security benefits at all.
  • The 8 Remaining States: As of 2026, only Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont still tax a portion of benefits.
  • The West Virginia Shift: West Virginia has officially completed its phase-out and now provides a 100% exemption for Social Security benefits starting with 2026 tax returns.
  • Exemption Thresholds: Even in the 8 states that still tax benefits, most provide full or partial exemptions for low-to-middle-income retirees (e.g., New Mexico exempts single filers earning under $100,000).

Strategic Exemption Categories

  • Military Retirement: 37 states now fully exempt military retirement pay from state income tax to encourage veterans to relocate.
  • Government/Teacher Pensions: States like Alabama and Hawaii exempt most government and defined-benefit pensions but may still tax private-sector 401(k) or IRA withdrawals.
  • Standard Retirement Credits: States like Arkansas allow a specific dollar-amount deduction (e.g., $6,000) for retirement income for those over age 59½.
  • Property Tax Relief: Many states that do tax income, such as Georgia, offer substantial homestead exemptions for seniors that can drastically lower the overall “cost of living” compared to no-income-tax states.

Source: 401k Specialist, “13 States Won’t Tax 401(k) Withdrawals in 2026”; Money.com, “Social Security State Taxes 2026”; Kiplinger, “Best States to Retire for Taxes.”