The Best States to Retire With a Large IRA or 401(k)

A $1 million traditional IRA carries a deferred tax bill that follows you into retirement. How much of that bill you actually pay depends heavily on which state you choose to retire in.

Nine states have no state income tax whatsoever. Several others exempt retirement income up to generous limits. A handful will tax every dollar you pull from your IRA at rates as high as 9% or more. For retirees drawing $80,000 to $150,000 per year from tax-deferred accounts, the difference between the best and worst states can easily exceed $10,000 annually.

The No-Income-Tax States Are the Clear Winners

The nine states with no personal income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In all nine, your IRA and 401(k) withdrawals face zero state income tax, period.

Florida and Texas are the most popular retirement destinations in this group, and for good reason. Florida has no income tax, no estate tax, and a homestead exemption that caps annual property tax assessment increases at 3% for primary residents. Texas has no income tax and no estate tax, though its property taxes are among the highest in the country, averaging around 1.60% effective rate. If you own a paid-off home in Texas, that matters.

Wyoming is the sleeper pick. It has no income tax, no estate tax, and some of the lowest property taxes in the country, with an effective rate around 0.55%. Cost of living is lower than Florida or Texas in most metro areas. For retirees who want to stretch a large IRA further, Wyoming deserves serious attention.

States With No Income Tax on Retirement Income

Beyond the nine no-income-tax states, several states with a general income tax fully exempt retirement income including IRA and 401(k) distributions.

Illinois exempts all retirement income from state tax, including IRA withdrawals, despite having a flat income tax rate of 4.95% on wages. Mississippi exempts qualified retirement income entirely. Pennsylvania does the same, exempting distributions from IRAs and 401(k)s for retirees who have reached retirement age.

These states require closer scrutiny than the no-tax states because the exemption applies specifically to retirement income. If you have other income sources like rental income or part-time work, those may still be taxed. But for a retiree whose primary income is IRA withdrawals, Illinois, Mississippi, and Pennsylvania all deliver a zero state tax rate on that income.

For a deeper look at how retirement income treatment varies by state, see our post on Best States for Retirees to Avoid Taxes.

The States to Avoid If You Have a Large IRA

California taxes all IRA and 401(k) withdrawals as ordinary income at rates up to 13.3%, the highest marginal state income tax rate in the country. A retiree pulling $120,000 per year from a traditional IRA in California pays several thousand dollars more in state income tax than the same retiree in Florida, every single year.

New York tops out at 10.9% on income over $25 million, but its effective rate on retirement income in the $80,000 to $200,000 range typically runs 6% to 8% after partial pension exclusions. New Jersey, Minnesota, and Oregon all tax retirement income at rates above 5% for most retirees. Vermont taxes Social Security and IRA withdrawals both.

If you are deciding between California and a no-tax state, our Florida vs. California: The Tax Reality post runs the numbers side by side.

Don't Ignore the Full Picture

State income tax on IRA withdrawals is the biggest variable, but it is not the only one. Property taxes, estate taxes, and cost of living all factor into how far your retirement savings actually go.

New Hampshire has no income tax and no estate tax, but median property taxes run higher than many retirees expect. Nevada has no income tax and relatively modest property taxes, but housing costs in Las Vegas and Reno have risen sharply. South Dakota has no income tax, no estate tax, and low cost of living, making it one of the most overlooked retirement states for people with significant accumulated wealth. If your estate is large enough to face estate taxes, check our breakdown at Estate Tax by State: Where Your Heirs Pay Most.

Use our retirement tax calculator to model your specific withdrawal rate against the states you are considering.

Key Takeaways

• Nine states impose zero state income tax, meaning IRA and 401(k) withdrawals are entirely free from state taxation: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
• Illinois, Mississippi, and Pennsylvania have state income taxes but fully exempt qualified retirement income, making them competitive options for retirees living off IRA withdrawals.
• California's top rate of 13.3% and New York's effective rate of 6% to 8% on retirement income can cost a retiree drawing $100,000 per year $6,000 to $13,000 more annually compared to a no-tax state.

Compare your specific situation across all 50 states at LiveOrDieHere.com to find out exactly where you keep the most of what you saved.