Best States to Retire: Tax-Free Retirement, Cost-of-Living, and Quality of Life

Federal employees who may be considering relocating after retirement should consider cost of living, lifestyle and taxes in each states.

Uncovering a sanctuary where state tax authorities don’t touch your retirement income is the ultimate way to a more secure and comfortable retirement. The prospect of keeping more of your Social Security, pension, and retirement savings isn’t merely wishful thinking, it’s a tangible reality in select tax-friendly states across the U.S.

This comprehensive guide sheds light on the advantages and considerations of residing in states that exempt your retirement income from taxation. It empowers federal retirees, military veterans, and future planners to make well-informed decisions for their golden years.

Additionally, we’ll explore the states with the lowest cost of living, highest quality of life scores, and states with inheritance and estate tax to address potential estate planning concerns.

It’s advisable to consult your state’s official website for up-to-date information on tax laws. While we’ve made every effort to compile information on each state’s tax laws, it’s important to recognize that tax regulations are subject to frequent changes. Please be aware that regardless of the state you retire in, there is no exemption from federal taxes.

What Makes a State Retirement-Friendly?

States with the Lowest Cost-of-Living

When finding an affordable state in which to live, the cost of living typically refers to the average expenses associated with basic necessities such as housing, groceries, transportation, healthcare, and utilities.

States with lower costs of living generally have more affordable housing, lower taxes, and lower overall expenses compared to states with higher costs of living.

Additionally, the cost of living may also encompass factors like the availability of affordable healthcare, quality of education, and recreational activities, which can vary significantly from state to state.

Here are the top 10 states with the lowest cost of living, ranked from the most affordable state, Mississippi.

  1. Arkansas
  2. Mississippi
  3. Alabama
  4. West Virginia
  5. South Dakota
  6. Oklahoma
  7. Kentucky
  8. North Dakota
  9. Iowa
  10. Louisiana

Source: Affordability Rankings 

States with the Highest Quality of Life 

Quality of life scores encompass more than just state tax laws. What’s truly important is whether you’ll genuinely enjoy the area you’ll call home in retirement.

Assessing ShareCare’s quality of life score involves reviewing their Community Well-Being Index, which considers various proven factors such as physical health, financial stability, social connections, community engagement, sense of purpose, healthcare accessibility, food availability, resource accessibility, housing, transportation, and economic security. For those interested, the index can be further explored at the city and county levels.

Here are the top 10 states with the highest quality life of scores, ranked from the happiest state, Massachusetts.

  1. Massachusetts
  2. Hawaii
  3. New Jersey
  4. Maryland
  5. New York
  6. California
  7. Connecticut
  8. Washington
  9. Colorado
  10. Utah

Assessing State Tax Policies on Social Security, Pension, and Retirement Distributions

When evaluating how retirement-friendly a state is, one of the critical factors is its taxation policies on retirement income.

States that do not tax retirement income, including Social Security, pensions, and TSP/401(k)s, stand out as havens for retirees. These states exempt retirement income from state income taxes, allowing retirees to keep more of their net take home pay. The absence of a state income tax rate on these distributions significantly impacts a retiree’s net income and financial freedom during retirement.

Comparing States with No Income Tax vs. Those That Do Not Tax Retirement Income

There’s a notable distinction between states with no income tax and those that specifically do not tax retirement income. States like Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not have personal income tax at all, which extends to retirement income. However, some states may have income tax but offer exemptions for different types of retirement income. 

States without Income Tax

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

States with No Income Tax – Will Social Security be Taxed?

States with no income tax will extend those exemptions to Social Security benefits. This policy further reduces the taxable income of retirees, ensuring that their Social Security benefits support a more comfortable lifestyle without the deduction of state taxes. It’s an essential factor for retirees, as Social Security benefits constitute a significant portion of income for many.

Analyzing the Tax Treatment of Social Security Retirement Benefits Across States

The tax treatment of Social Security retirement benefits varies significantly across states. While 9 states tax Social Security benefits to some extent, the majority do not. This variance highlights the importance of understanding state tax laws and their impact on retirement planning. States that exempt Social Security benefits from taxation present a compelling advantage for retirees reliant on these payments.

States That Do Not Tax Social Security

NebraskaNevadaNew HampshireNew JerseyNew YorkNorth CarolinaNorth Dakota
OhioOklahomaOregonPennsylvaniaSouth CarolinaSouth DakotaTennessee
TexasVirginiaWest Virginia*WashingtonWisconsinWyomingStates w/o tax
* Being phased out

States That Tax Social Security

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Montana
  • New Mexico
  • Rhode Island
  • Utah
  • Vermont

States That Do Not Tax Pension Income 

Living in a state that does not tax pension income can markedly enhance a retiree’s lifestyle. With no state tax on your pension, retirees can allocate more funds toward leisure, healthcare, and family support. This financial relief contributes to a more enjoyable and stress-free retirement, as the fear of dwindling savings due to state taxes diminishes. It is not just about the numbers; it’s about the peace of mind and quality of life that comes from financial security in retirement.

MississippiMissouri*NevadaNew Hampshire
PennsylvaniaSouth DakotaTennesseeTexas
WashingtonWyomingStates w/o income tax
* Exempt public pensions only
** Phasing to 100% exempt by 2026

Exploring States with No Income Tax on TSP, 401(k)s, and IRAs

To make the most of living in a state with favorable tax laws for retirement accounts, one must first understand the different types of retirement accounts and their associated tax implications.

Thrift Savings Plan (TSP), 401(k)s, IRAs, and other tax-deferred retirement accounts usually offer tax-deferred growth, meaning taxes are paid upon distribution. In states that do not tax these distributions, retirees can enjoy the full value of their savings without a significant portion going to state coffers.

States That Do Not Tax TSP, 401(k), & IRA Withdrawals

NevadaNew HampshirePennsylvaniaSouth Dakota
States without income tax

How to Plan Your Retirement Distributions for Maximum Tax Efficiency

Planning retirement distributions for maximum tax efficiency involves considering both the timing of distributions and the state in which you reside. In states that do not tax retirement income, it may be advantageous to take larger distributions if you plan on moving to a more tax friendly state in retirement. The same idea would apply if you intend on conducting Roth conversions. Keep in mind that timing and amount should also account for federal income taxes and the potential impact on Social Security benefits taxation.

Military Retirement and State Tax Policies

For military retirees, certain states stand out for their favorable tax policies on military retirement pay. States that exempt military retirement pay from state taxes or offer significant deductions provide financial benefits that can influence a retiree’s decision on where to live. These policies acknowledge the service and sacrifice of military personnel, offering them a degree of financial relief in retirement.

States That Do Not Tax Military Retirement Income

NebraskaNevadaNew HampshireNew JerseyNew YorkNorth Carolina
North DakotaOhioPennsylvaniaRhode IslandSouth CarolinaSouth Dakota
TennesseeTexasUtahWashingtonWest VirginiaWisconsin
WyomingStates without income tax
* Some states have large exemptions

States With Inheritance Tax & Estate Tax

When it comes to estate planning and managing your assets, understanding the inheritance tax and estate tax is crucial. These taxes can have a significant impact on the value of the estate that you leave behind for your heirs.

To learn more about inheritance and estate tax check out the article States With Inheritance Tax & Estate Tax.

What is Inheritance Tax?

Before understanding the nuances of inheritance tax, it’s essential to differentiate it from estate tax.

While estate tax is levied on the estate as a whole, inheritance tax is imposed on the beneficiaries who receive the assets from the estate. This means that the tax liability is determined by the relationship between the heir and the deceased individual, which can result in varying tax rates based on the inheritor’s status.

There is no federal inheritance tax. Presently, only six states impose a state inheritance tax, each with its own rates and exemptions.

It’s crucial for individuals to be aware of whether their state is subject to inheritance tax to effectively plan for the distribution of their assets.

States with an Inheritance Tax

  • Iowa
  • Kentucky
  • Maryland
  • Nebraska
  • New Jersey
  • Pennsylvania

Understanding Estate Tax

Estate tax is a federal tax imposed on the transfer of the estate of a deceased individual. For 2024, the federal estate tax threshold is $13.61 million for individuals, which means married couples don’t have to pay estate tax if their estate is worth $27.22 million or less.

The federal estate tax limit is based on the value of the estate, taking into account assets such as cash, real estate, securities, and business interests. While the federal estate tax is uniform across the United States, some states also impose their own estate tax, further impacting the overall tax liability of the estate.

Thirteen states impose their own estate tax, each with its unique rates and exemption thresholds. Understanding the applicability of estate tax in your state is essential for accurate tax planning and minimizing the tax impact on your estate. Below is each state and the applicable exemption. 

States with an Estate Tax

  • Connecticut
  • District of Columbia
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington

As retirees consider their ideal retirement destination, researching factors such as tax-free retirement income, cost of living, and quality of life can help you feel confident come retirement. To maximize benefits, retirees are encouraged to consult a CPA in the state in which they plan to retire. Taking proactive steps now can lead to a more comfortable and fulfilling retirement lifestyle.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Securities and advisory services offered through Osaic Wealth, Inc., member FINRASIPCOsaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Representatives may not be registered to provide securities and advisory services in all states. Branch address: 10701 Parkridge Blvd, Ste 130, Reston, VA 20191. Branch phone: 571-543-2783.

About the Author

Brennan Rhule, co-founder of PlanWell Financial Planning, is focused on empowering federal employees to retire with confidence. PlanWell is committed to providing financial education to Feds on a national level, delivered through weekly articles, webinars, and personalized guidance. Sign up to attend our Federal Retirement Webinars – we hope to see you there!