Pensions aren’t as common as they used to be in the private sector, as more companies have shifted away from traditional pension plans over the past few decades.
According to the latest government data, only 15% of private sector workers had access to defined benefit plans. Most employees now rely on 401(k)s and other similar retirement savings options.
Sponsored by employers or unions, pension plans offer a fixed and dependable income stream during retirement for life. They are also less risky than a 401(k) plan, as the investments are managed and insured by your company. Finally, pension plans have specific tax advantages that may make them more attractive to some folks.
That being said, some states are more tax-friendly than others when it comes to your pension. Here’s what you need to know to make the most out of your retirement savings.
Is my pension taxable?
When it comes to taxes, pensions can be a bit tricky. Generally speaking, pension income is taxable at the federal level, so you need to consider this when planning your retirement budget. For more information, see How the IRS Taxes Retirement Income.
However, as Kiplinger reports, taxes in retirement vary from state to state. For instance, some states tax pension income fully, while others offer partial or complete exemptions.
For a state-by-state breakdown, see Kiplinger's guide: Retirement Taxes: How All 50 States Tax Retirees.
As you consider where you’d like to retire, you should know how your pension and other retirement income will be taxed in your state of choice. That way, you can avoid unwelcome surprises when it's time to file your tax return.
Some states don’t tax Social Security
All this talk of pensions may have you wondering about states that tax Social Security.
As of 2026, eight states tax Social Security benefits, with rules varying by age and income, similar to pensions. Some states offer tax benefits for individuals under a certain age, while others provide exemptions based on adjusted gross income (AGI).
Meanwhile, many states either don't tax Social Security income or offer specific exemptions.
16 states that don’t tax your pension income
Some states don’t tax your retirement income at all, but others may have certain exemptions on private or government pensions.
Here’s our list of the 16 states that will give you a tax break on some of your retirement income. (States are listed alphabetically.)
Alabama can be a tax-friendly state for retirees, especially regarding pension income. Private sector defined benefit pensions, military retirement, and government pensions are exempt from state tax.
However, traditional IRA and 401(k) distributions are taxable. Retirees still get a tax break: The first $6,000 of retirement income for those 65 and older is tax-exempt.
Alabama also doesn't tax Social Security benefits. That's another big plus for retirees in the state.
Income Tax Range: For all taxable income, including 401(k) funds and IRA distributions, the lowest Alabama tax rate is 2% (on up to $1,000 of taxable income for joint filers and up to $500 for all others), while the highest rate is 5% (on more than $6,000 of taxable income for joint filers and more than $3,000 of taxable income for all others).
In Alaska, you don't have to pay income tax on your pension — or on any income, for that matter. It's one of the states with no income tax.
Additionally, you won't pay income tax on 401(k) and IRA distributions in Alaska either. Like most states, Alaska doesn't tax Social Security benefits.
The savings keep on piling up in the Last Frontier, as the state does not have an estate or inheritance tax. That may be reasonable for some folks who don’t mind moving to a chilly state and making the most of their pension.
If you're looking for a warmer climate to enjoy your retirement, you may consider Florida. But there are more reasons to retire to Florida than just the palm trees and sandy beaches. The Sunshine State doesn't have an income tax, so your pension won't be taxed there.
Florida is also good to retirees when it comes to 401(k)s and IRAs. There are no state taxes on distributions from these retirement savings plans.
As you may have guessed, Florida doesn't tax Social Security benefits, either.
That being said, residents of the Sunshine State have been known to complain about climbing property taxes. In response, Gov. Ron DeSantis is proposing a state constitutional amendment to abolish property taxes on primary residences, which will appear on the November 2026 ballot. However, economists warn that this move may cause the state and localities to increase sales tax to properly fund schools and public services.
Hawaii doesn't tax all pension income, but there are some things you should know to avoid a surprise at tax time.
- Retirement distributions from a private or public pension plan are tax-free in Hawaii only if you didn't make contributions to the plan.
- Employee-contributed retirement plans are partially taxable in Hawaii. (This means you will only pay income tax on the value increase resulting from your contributions.)
Distributions from 401(k) plans and IRAs are taxable in Hawaii.
For income that is taxed, the lowest Hawaii tax rate is 1.4% (on taxable income up to $4,800 for joint filers and up to $2,400 for single filers). The highest rate is 11% (on more than $400,000 of taxable income for joint filers and more than $200,000 for single filers).
Lastly, Hawaii doesn't tax Social Security benefits.
Illinois is one of the states that won't tax your retirement income, including income from private pensions (as long as it's from a qualified employee benefit plan). You won't pay tax on payments from government or military pensions, either.
Distributions from a 401(k) plan are tax-free if the plan is a qualified employee benefit plan. Additionally, IRA distributions and Social Security benefits are not taxed in Illinois, making the state a tax-friendly haven for retirees.
Eligible Iowa residents do not need to pay tax on qualified pension income, including income from private pensions. To qualify for the exemption, taxpayers must be at least 55 by the end of the tax year. Additionally, one spouse may qualify for the income exemption even if the other spouse does not. This means that Iowa can tax one spouse and not the other.
Federal government pensions and military pensions are also tax-exempt in Iowa.
Just like other states featured in our list, Iowa won't tax 401(k) and IRA distributions. The same rules for public pension income exemption apply to 401(k) and IRA income.
Additionally, Iowa does not tax Social Security retirement benefits.
Iowa will phase down over the next two years to a single tax rate for all taxpayers. In 2025, there will be two Iowa income tax brackets with a top rate of 4.82%. Beginning in tax year 2026, Iowa will have a flat 3.9% income tax rate.
Michigan has been phasing out its state income tax on pension income, with the change fully taking effect in the 2026 tax year (returns you typically file in 2027).
While the measure is often described as eliminating the state's income tax on pensions, it also applies to most other forms of retirement income for Michiganders, including withdrawals from 401(k) plans, IRAs, annuities, and certain deferred compensation plans.
Legislation passed in 2023 gradually expanded the allowable deduction over several years, thereby reducing the taxable portion of this income.
So, beginning in January 2026, qualifying pension and retirement income will be fully exempt from Michigan income tax, which should provide some tax relief to retirees across the state.
Mississippi is ranked by Kiplinger as one of the most tax-friendly states for retirees. That's partly because the state doesn't tax pensions (as long as it isn't for early retirement).
As for taxes on 401(k) and IRS distributions, you won’t have to worry. Mississippi doesn't tax distributions from these plans. The state doesn’t tax Social Security benefits, either.
As for income tax rates, for 2026, earnings over $10,000 are taxed at a rate of 4%. For 2027, any excess income over $10,000 will be taxed at 3.75%.
For more information about retiring in Mississippi, check out Kiplinger's report, The Most Tax-Friendly State for Retirement.
Nevada won't tax your pension income because it doesn't have an income tax. With no income tax, there's also no tax on 401(k) or IRA distributions.
Social Security benefits are also tax-free, and there are no estate or inheritance taxes in Nevada.
However, before you pack your bags consider other taxes. Nevada has a 6.85% state sales tax and an average combined state and local sales tax rate of 8.24%.
Related: The Most Tax-Friendly State for the Middle-Class.
New Hampshire does not have a general income tax. That means there is no tax on your pension income if you retire to the Granite State.
With no income tax, your 401(k) and IRA distributions are tax-free, too. Furthermore, there is no state tax on Social Security benefits.
There is some good news for retirees in Pennsylvania. For one, the Keystone State doesn't tax pension income you receive from an eligible employer-sponsored retirement plan (unless you retire early, that is, before meeting the plan's age and/or service requirements).
As for your 401(k) and IRA distributions, Pennsylvania won't tax these (unless you take them early, before you meet the age requirement). Your Social Security benefits aren't taxable in Pennsylvania.
Income Tax Range: Pennsylvania has a flat income tax rate of 3.07%. However, municipalities and school districts can tax your income, too.
South Dakota has no income tax, so there's no state tax on your pension income. More good news: there is no South Dakota income tax on withdrawals from your 401(k) or IRA, either.
Nor will the state tax your Social Security retirement benefit, estate, or inheritance.
So where will you see taxes? South Dakota has a 4.20% state sales tax and levies an average combined state and local sales tax rate of 6.11%. It also has a .99% effective property tax rate, according to the latest data from the Tax Foundation.
Retirees in Tennessee don't pay tax on their pension income, because there's no income tax in the state. Your 401(k) or IRA distributions won’t face taxes, either.
Tennessee retirees don't pay state income tax on Social Security retirement benefits, nor do they pay taxes on estate or inheritance.
Still, Tennesseans face a 7% state sales tax that rises to an average combined state and local sales tax of 9.61%. That places the Volunteer State among the states with the highest sales tax in the nation.
No state tax on your pension income might be one reason to move to Texas. In fact, the Lone Star State doesn't impose an income tax at all.
Of course, because there's no income tax, there's no tax on your Social Security benefits in Texas. Early 401(k) or IRA withdrawals won’t be taxed, but are subject to a 10% IRS early-withdrawal penalty.
That being said, Texans face a 6.25% state sales tax and an average combined state and local sales tax of 8.20%, according to the latest data from the Tax Foundation.
Some good news: Texas has a sales tax exemption on groceries. However, non-food items such as pet items, beauty products, clothing, books, paper, or certain edible items sold at a grocery or convenience store are subject to taxes.
In the great Northwest, Washington State could be a terrific place to retire if you're living off a pension. That's because Washington is yet another state that doesn't impose an income tax.
The Evergreen State won't tax distributions from your 401(k) or IRA. Social Security benefits and estates are tax-exempt in Washington, too.
While the state doesn’t have income taxes, you’ll get taxed in other ways. Washington imposes a 7% capital gains tax (tax on stocks, bonds, etc.) if annual profits exceed $278,000 and $1 million. Profits exceeding $1 million are taxed at 9.9%.
Folks also face a 6.50% state sales tax and an average combined state and local sales tax of 9.47%. Property taxes also average 0.75% for owner-occupied homes.
Wyoming doesn't have an income tax, so you don't have to worry about a state tax hit on your pension.
Wyoming is also very taxpayer-friendly when it comes to your retirement savings plans. There are no taxes on withdrawals from 401(k) plans and IRAs. Like most other states, Wyoming doesn't tax your Social Security benefits, estate, or inheritance.
You’ll get taxed while you’re shopping, though. In Wyoming, the state sales tax rate is 4%. The combined state and local sales rate sits at 5.56%, on average. As for owner-occupied real estate, you can expect a 0.55% - 0.58% average effective property tax rate.
Not to mention, Wyoming levies a 24-cent per gallon gas tax, which is relatively low.
Those tax rates aren’t that high compared to the rest of the country, ranking Wyoming’s tax system as the best on this list.
