As another new year begins, here’s a quick look at which states do not tax 401(k) distributions—consisting of nine states where all income—including 401(k) distributions—is not subject to state income tax and four states that exempt retirement income.
Alphabetically, the nine with no state income tax are: Alaska, Florida, Nevada, New Hampshire (which repealed its interest/dividends tax as of Jan. 1, 2025), South Dakota, Tennessee, Texas, Washington and Wyoming.
Because these states lack a personal income tax, traditional 401(k) distributions, IRAs, pensions, and most other retirement income (including Social Security income) are not taxed at the state level. It should be noted that Washington does have a capital gains tax, though there are exemptions and deductions that may eliminate or lower the amount that is owed.
A handful other states charge income taxes to residents, but they exempt retirement income. These states include Illinois (which has a flat income tax of 4.95% but retirement income is exempt), Mississippi (which exempts retirement income but early withdrawals may not qualify), and Pennsylvania. In Mississippi, the tax rate is set to be reduced gradually to 3% by 2030, with further decreases until the tax is eliminated entirely. The rate will fall to 4% in 2026.
And then you have a bit of a special case with Iowa, which due to a 2022 law allows retirees to withdraw retirement income tax-free provided they meet specific age requirements. Iowa exempts retirement income from taxes, but only for those 55 or older or meet another type of criteria, such as being disabled or being the surviving spouse of someone who had access to a pension.
There are currently nine states that tax Social Security benefits, including: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia. The amount taxed in some of these states is based on adjusted gross income (AGI) and filing status. West Virginia is phasing out its tax on Social Security benefits and will eliminate it entirely in 2026.
SEE ALSO:
• 9 States Still Taxing Social Security Benefits in 2024
• States Where $1.5 Million Lasts Longest, Shortest in Retirement
• This Pacific Northwest State Attracts Workers and Retirees Alike