The major sources of income for retirees are Social Security and their 401(k) plans. In most states, all or part of this income is taxed, but there are 12 states that do not tax these retirement incomes at all.
States With No Income
There are states that do not tax retirement income or any other type of income:
- New Hampshire
- South Dakota
Social Security benefits, 401(k), and IRA distributions are considered income, so if you reside in any of these states, you won't have to pay state income tax on these sources of retirement income. The same is true of distributions from an employer pension plan.
Although the remaining 41 states have an income tax, three exempt retirement income from being taxed. These types of income include 401(k) plans, IRAs, pension plans, and Social Security benefits.
There are some stipulations to the exemptions. Mississippi does tax pension income for early retirement before the age of 59.5. Pennsylvania taxes pension income for residents who retire before the age of 60.
All three of these states will tax any other income outside of retirement accounts. So if you receive dividends or sell stocks that aren't held in an IRA or 401(k) plan, you will have to pay taxes.
What About The Rest?
The remaining states tax at least some types of retirement income. Thirty-eight states, however, do not tax Social Security benefits. There are also other exemptions in other states. For example, Alabama and Hawaii tax distributions from 401(k)s and IRAs, but neither taxes retirement income from pension plans or Social Security.
Thirty-four states do not tax military retirement income. Those states include the previous twelve and the following:
- New Jersey
- New York
- North Carolina
- North Dakota
- West Virginia
The Unfortunate Truth
Despite the fact that a few states do not tax retirement income, you will still likely have to pay federal taxes. The Internal Revenue Service (IRS) requires taxes to be paid on a portion of your Social Security benefits depending on whether you file as an individual, are married with a joint return, or are married with separate returns, as well as your income level.
The federal government will also tax you on your pension, 401(k), and IRA income. The only exceptions are Roth 401(k) plans and Roth IRAs. With these two types of retirement accounts, you pay taxes on your contributions, and then it grows tax-free.
This article was produced and syndicated by Wealth of Geeks.