Where Your 401(k) Withdrawals Won't Get Taxed: A State-by-State Guide

Planning retirement means thinking beyond just the savings amount—location matters too. Which states don’t tax 401k withdrawals? This question deserves serious attention, as your residency could determine how much of your hard-earned retirement distributions actually make it into your pocket.

The challenge is real. With inflation climbing and uncertainty around federal tax obligations, many Americans are watching their retirement nest eggs shrink faster than expected. But here’s the good news: your choice of state can significantly impact your after-tax retirement income.

Understanding How Retirement Distributions Get Taxed

Let’s start with the basics. Withdrawals from tax-deferred accounts—like traditional IRAs, 401(k)s and 403(b)s—are typically taxed as ordinary income when you withdraw them. Your Social Security benefits and pension payments face similar treatment. However, not all states pile on additional income taxes to what you already owe federally.

Some states take a completely hands-off approach by having no income tax whatsoever. These include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming. Washington presents an interesting middle ground: no income tax, but a capital gains tax on certain high earners applies.

The catch? States without income tax often compensate through higher sales taxes and property taxes, so the math doesn’t always work out perfectly. That’s why looking at states that specifically exempt retirement distributions offers a clearer advantage.

The Best Destinations for Tax-Free Retirement Income

Mississippi: The Affordable Retirement Haven

Mississippi recently reduced its income tax rate to 4.4%, with plans to drop it to 4% by 2026. But here’s what makes Mississippi genuinely attractive: the state completely exempts retirement income from taxation. This encompasses Social Security payments, pension distributions, and withdrawals from 401(k)s and IRAs—all tax-free to retirees who meet plan requirements.

Combined with low property taxes and moderate sales taxes, Mississippi offers one of the most budget-friendly retirement environments available.

Illinois: Maximum Exemptions on Retirement Accounts

Despite maintaining a flat 4.95% income tax rate, Illinois provides broad exemptions on retirement income. The state excludes nearly all retirement sources from taxation, including:

• 401(k) and IRA distributions (both traditional and Roth)
• Pension and Social Security income
• Government retirement and disability benefits
• Railroad retirement income
• Lump sum distributions from employer securities

Illinois’ approach means you’ll pay virtually nothing in state income tax on your retirement income, regardless of amount or source.

Pennsylvania: Simple and Retiree-Friendly

Pennsylvania charges a flat 3.07% personal income tax but excludes retirement income entirely from this calculation. The state doesn’t tax distributions from employer-sponsored retirement plans, IRAs, Social Security, pensions, or disability retirement benefits. This straightforward policy makes Pennsylvania predictable for retirement planning.

Iowa: New Opportunities for Residents 55+

Starting in 2023, Iowa launched a retirement income exclusion for taxpayers aged 55 and older. While the state maintains a 3.8% flat tax rate, retirees over 55 pay nothing on retirement income, which broadly includes pensions, 401(k) withdrawals, IRAs, annuities and deferred compensation plans.

To qualify, you must be 55 or older on December 31 of the tax year, disabled, or a surviving spouse of someone who qualified based on age or disability.

Making Your Decision

The question of which states don’t tax 401k withdrawals has multiple answers, depending on whether you’re looking for zero income tax across the board or targeted retirement income exemptions. States like Mississippi, Illinois, Pennsylvania and Iowa offer compelling advantages specifically for retirees, allowing you to maximize what you’ve saved while keeping more of your money in retirement.

Your move to one of these states could translate into thousands of dollars in annual tax savings—money that could extend your retirement years or improve your quality of life.