Tax return 2024: which states do not tax retirement savings and why?

Monday 29 January is the date that marks the start of the 2024 tax filing season as millions of Americans begin the sometimes unwanted task of getting their papers in order. As you likely already know, federal income tax is applicable to Social Security benefits, as well as pension payments, and distributions from IRA and 401(k) plans, when the total income surpasses the limit set by the United States government. And as per the guidelines from the Social Security Administration (SSA), recipients will be taxed at a rate ranging from fifty to eighty-five percent based on their income. Full and up-to-date details, as always, can be found at the IRS website for seniors and retirees.

When it comes to tax requirements over retirement savings, this can vary quite considerably across the states, and we’re here to try and bring some clarity to those that remove the burden completely, and those that offer partial reductions. For some retirees, this could affect where you decide to settle down for the golden years of your life, and for all it will be an important consideration for your general financial planning.

Tax-free retirement saving by state

Although the aforementioned benefits and plans related to retirement income is susceptible to federal income taxes, exemptions can exist for distributions from Roth IRA and Roth 401(k) plans. Notably, federal income taxes on Roth contributions are settled before the contributions are initiated. After a waiting period of five years and reaching the age of 59 and a half, both the initial contributions and any investment gains can be withdrawn without incurring federal income taxes.

The following eight states take no income tax at a local level, which includes wages, dividends, salaries, interest as well as Social Security retirement benefits, pension payments, distributions from retirement accounts and income from securities held in non-retirement brokerage accounts.

It’s worth noting that while New Hampshire does currently tax dividends and interest, it also has no state income tax on wages, salaries, etc like the above eight states. As with all tax situations, it can change, and New Hampshire is one state already making plans to phase out its 5% tax on dividends and interest by January 2027.

Small tax requirement in retirement by state

While some states are not explicitly listed as exempt from taxing retirement income, they still offer substantial tax benefits for retirees:

Georgia: doesn’t tax Social Security benefits and allows a deduction of up to $65,000 per person on other retirement income.

Pennsylvania: Social Security benefits, as well as income from IRAs and 401(k)s, are entirely exempt, and pension payments are tax-free for individuals over 60.

Zero tax on Social Security

The following states, which include those above, do not tax SS benefits

In navigating the intricate landscape of tax implications on retirement income, it is crucial to recognize the unique nuances of each state and the evolving nature of tax laws. While this article provides useful information, it is strongly recommended that readers consult with a knowledgeable financial advisor. A professional advisor can offer personalized guidance, taking into account individual circumstances and ensuring a thorough understanding of the latest tax regulations. By seeking expert advice, you can make informed decisions tailored to your financial goals, ultimately maximizing the benefits of your retirement income.