Taxes & Rollovers
Pension Taxes by State: Where Your Retirement Income Is Taxed
How pension and retirement income is taxed by state: the nine states with no income tax, the states that fully exempt pensions, and how state taxes affect a lump sum buyout decision.
Key Takeaways
- Nine states levy no personal income tax at all, so they tax no pension income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
- A handful of income-tax states still fully exempt pension income, including Illinois, Mississippi, and Pennsylvania.
- A direct rollover of a lump sum is not taxable by any state in the year of the rollover, which defers the state question until you withdraw.
- State rules change frequently and are full of exceptions, so confirm your state's current treatment before making an irreversible election.
- Where you will live in retirement can matter as much as the buyout math, because a move can change the tax on the same income.
In this article
Whether your state taxes pension income depends on which of four groups it falls into: states with no income tax at all, states that fully exempt retirement income, states that partially exempt it, and states that tax it like wages. If you are weighing a lump sum, this matters twice: state tax shapes the value of keeping the monthly checks, and it shapes what a rolled-over lump sum eventually costs when you draw it down, possibly after a move. The buckets below are stable enough to plan around, but the fine print changes every year, so treat this as a map, not the final word.
The nine states with no income tax
These states impose no personal income tax, so they tax no pension, no IRA or 401(k) withdrawal, and no Social Security:
- Alaska
- Florida
- Nevada
- New Hampshire (no tax on wages or retirement income; it historically taxed some interest and dividends, which is being phased out)
- South Dakota
- Tennessee
- Texas
- Washington (no income tax on wages or pensions; it does levy a capital gains tax on certain high investment gains, not on pension income)
- Wyoming
For a retiree in one of these states, the state-tax column simply drops out of the buyout decision. A rolled-over lump sum will also owe no state tax on withdrawals as long as you remain a resident.
Income-tax states that still exempt pensions
Several states levy an income tax but carve out most or all retirement income. Notable examples where qualified pension and retirement-account income is broadly exempt include:
- Pennsylvania, which exempts qualified pension and retirement plan distributions from its flat income tax.
- Illinois, which does not tax distributions from most pensions, 401(k)s, and IRAs.
- Mississippi, which exempts qualified retirement income.
Other states offer age-based or dollar-capped exemptions that have shifted in recent years (Iowa and Michigan among them), which is exactly why a current-year check matters. The direction of travel nationally has been toward more generous retirement exemptions, not fewer, but the details are a moving target.
Why the rollover changes the state question
If you take a lump sum and roll it directly to an IRA, no state taxes it in the year of the buyout, because a direct rollover is not a taxable event anywhere. The state question moves to later, when you withdraw from the IRA, and is decided by where you live then. That has two practical implications:
- A lump sum gives you timing and geography control the monthly pension does not. You can withdraw in low-income years, or after moving to a no-tax state.
- It also introduces uncertainty. A monthly pension's state treatment is knowable today; a future IRA drawdown depends on rules and residences that do not exist yet.
See the full tax rules and how to roll a lump sum into an IRA.
How to factor state tax into a buyout decision
- Confirm your state's current treatment of pension income and lump sums. Start with your state department of revenue.
- Decide where you expect to live. If a move to a lower-tax state is likely, that favors the flexibility of a rolled-over lump sum.
- Run the pre-tax comparison first in our calculator, then layer state tax on top as a tiebreaker, not the headline. For most people the health, longevity, and survivor factors still dominate.
Frequently asked questions
Which states do not tax pension income?
The nine states with no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) tax no pension income. Several income-tax states also fully exempt pensions, including Illinois, Mississippi, and Pennsylvania.
Do I pay state tax on a pension lump sum?
Not if you roll it directly to an IRA; a direct rollover is not taxable by any state in the year of the buyout. If you take the lump sum as cash, it is taxed by your state according to that state's rules for retirement income.
Does moving states change how my pension is taxed?
Yes. Your state of residence when you receive income generally determines state tax. Moving to a no-income-tax state before drawing down a rolled-over lump sum can eliminate the state layer, though federal rules still apply.
Is Social Security taxed by states?
Most states do not tax Social Security benefits; the large majority of states plus the District of Columbia exempt it. A minority still tax some Social Security income, so confirm your state's current rule.
Article sources
Our editorial standards require primary sources: government publications, regulator data, company filings, and established industry research.
Related reading
- Pension Buyout Tax Rules: Rollovers, Withholding, and Penalties
How lump sum pension buyouts are taxed: the direct rollover that avoids the 20 percent withholding, the 60-day trap, early withdrawal penalties, and what stays tax-deferred.
- How to Roll a Pension Lump Sum Into an IRA, Step by Step
The exact steps to move a pension buyout into an IRA with zero tax withheld: opening the account, the election form, the check, and the January 1099-R.
- Lump Sum vs. Monthly Pension: How to Decide
A plain-English decision framework for pension buyout offers: when the lump sum wins, when the monthly check wins, and the math that settles it.
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