Which states don’t tax 401k?

After years of soaking away retirement savings, you can choose to permanently leave the workforce and start collecting the retirement savings you’ve worked so hard to accumulate. Before making the final decision to exit the workforce, you should decide the best state to stay after retirement. Each state has different tax rules for retirement income, and the state you reside in can make a big difference in the amount of taxes you pay.

Most states tax a small portion of the retirement income you earn, while some states may exempt retirement income from 401(k)s and IRA. Some of the states that don’t tax 401(k) include Alaska, Illinois, Nevada, New Hampshire, South Dakota, Pennsylvania, and Tennessee. You can save a lot of money if you live in these states since your retirement income will be exempt from taxation.

States That Don’t Tax 401(k)

If you live in one of these states, you could be exempted from paying taxes on your 401(k) retirement income:

Alaska

Despite being one of the coldest states, Alaska has a friendly tax structure for its senior citizens. It does not have a state income tax, and there are no income taxes charged on 401(k) or IRA retirement income. However, the state has one of the highest property tax rates in the US.

South Dakota

If you live in South Dakota, you will be exempted from paying any state taxes on 401(k) retirement income, 401(k) withdrawals, and pension payments. However, the state imposes property and sales taxes on its residents. South Dakota is a good state to retire in if you want to stretch your retirement savings over several years.

Tennessee

Tennessee has an income tax structure, but it only taxes interests and dividends earned on investments. Residents do not pay taxes on their 401(k) distributions, social security benefits, and pension income. Also, senior citizens above age 65 are exempted from paying taxes. However, the country charges a state sales tax of 7% on goods purchased within the state.

Pennsylvania

If you retire after attaining the required retirement age, your retirement income from an eligible employer-sponsored plan will be exempted from taxation. This means that you won’t pay income taxes on 401(k) income, IRA payments, and social security payments. However, if you retire before attaining 59 ½, you may be required to pay taxes on your 401(k) withdrawals. There is a 6% state sales tax on most purchases.

Nevada

Nevada does not impose state income taxes on 401(k) earnings or income from a part-time job. The state also exempts IRA and pension income from taxation. Retiring in Nevada can significantly save you money since your retirement income will not take a hit from state taxes. There is a 6.85% state sales tax on purchases.

New Hampshire

New Hampshire is a good place to retire if you are looking to live off your retirement income only. Although there is a state income tax structure in place, the state government only taxes interest and dividends. Any earnings from a 401(k), IRA, and social security benefits are exempted from taxation. Also, the state does not charge sales tax on purchases. However, New Hampshire has one of the highest property taxes in the country.

Florida

Apart from the sandy beaches and sunny winters, Florida has a good tax environment for retirees. The state does not have an income tax, and you can keep most of your 401(k) earnings, social security benefits, and any income you earn from a part-time job. However, the state imposes a state sale tax of 6%.

Illinois

Although Illinois has an income tax, residents are allowed to deduct retirement income from a qualified employer-sponsored retirement plan such as 401(k) and IRA. The state also exempts pension income and social security benefits from taxation. The state charges a 6.25% state sales tax on purchases.

Mississippi

If you live in Mississippi, your 401(k) income is exempted from income taxes if you retire after age 59 ½. If you retire before attaining the retirement age, your 401(k) earnings may be subject to taxation at your tax bracket rate.  However, the state imposes a high sales tax rate of 7%.

Texas

If you retire in Texas, you don't have to worry about paying taxes on your 401(k) and IRA distributions since there is no state income tax. If you plan to continue working part-time during your retirement, there will be no state income taxes on your earnings. However, the state has a sales tax and property tax.

Washington

Washington is another tax-friendly state, and the state government will not impose state income taxes on your 401(k) distributions, regardless of how much you earn. The state does not have an income tax, and hence, other retirement distributions such as social security benefits and pension will not take a hit. However, you can expect to pay a sales tax on purchases and property taxes if you own a home.

Wyoming

Wyoming does not have a state income tax, and you won’t owe any taxes on your retirement income, social security benefits, and other income from part-time employment. The state imposes a sales tax of 4%, and it has some of the modest property tax rates in the US.