13 States Let Retirees Skip State Tax on 401(k) Withdrawals

Thirteen states in 2026 let qualifying retirees take 401(k) and IRA withdrawals without paying state income tax, though federal taxes still apply and several states attach age or distribution restrictions.

"Distributions from IRAs and 401(k) plans are not subject to Tennessee tax," the Tennessee Department of Revenue states in published guidance, one of several state agencies that spell out retirement-income exemptions. The Nevada Department of Taxation similarly reaffirmed the state's no-individual-income-tax status in its March 2026 guidance.

Nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — impose no broad personal income tax, so retirement distributions escape state taxation by default. Four others — Illinois, Iowa, Mississippi and Pennsylvania — levy income tax but carve out qualifying retirement income. Illinois applies a 4.95 percent individual income tax but lets taxpayers subtract federally taxed retirement-plan income. Iowa, at a 3.8 percent flat rate, excludes eligible retirement income for taxpayers 55 and older, disabled taxpayers and certain survivors. Mississippi exempts retirement income but warns early distributions may be taxable. Pennsylvania taxes income at 3.07 percent but exempts employer-plan payments after retirement and IRA distributions after age 59½.

The stakes are meaningful for retirees deciding where to live or how much to withdraw. On a $50,000 annual 401(k) distribution, a retiree in a state taxing that income at 4.95 percent would owe roughly $2,475 a year in state tax — money that stays in the account in the nine no-income-tax states. With federal taxes still applying to traditional-account withdrawals, the state-level break can be the difference between a comfortable budget and a shortfall.

Nine States With No Income Tax

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming have no individual income tax, so 401(k) and IRA distributions are not taxed at the state level regardless of withdrawal size. Texas's constitution permanently prohibits the legislature from imposing a personal income tax, giving retirees there a stronger legal guarantee than most other states. New Hampshire repealed its tax on interest and dividends for taxable periods beginning after Dec. 31, 2024, eliminating the last vestige of state income taxation. Washington imposes a separate capital gains tax, but the Department of Revenue lists assets held in certain retirement accounts as exempt, so a normal retirement-account withdrawal does not become taxable state income.

Four States With Retirement Carve-Outs

Illinois, Iowa, Mississippi and Pennsylvania tax income but exclude qualifying retirement distributions. Illinois allows taxpayers to subtract federally taxed income from qualified employee benefit plans, including 401(k)s, and from IRAs, with guidance saying early distributions may also qualify. Iowa's exclusion applies to taxpayers 55 and older, disabled taxpayers and certain qualifying survivors, so younger taxpayers taking ordinary distributions do not automatically get the break. Mississippi generally does not tax retirement income once the recipient has met the plan's requirements, but the state specifically warns that early distributions are not considered retirement income and may be taxable. Pennsylvania exempts employer-plan payments once the recipient has retired and met the plan's age or service requirements, and exempts IRA distributions not subject to an early-withdrawal penalty, such as after age 59½.

The practical takeaway for retirees is that state of residence can materially change the after-tax value of a retirement nest egg. A retiree drawing $50,000 a year from a traditional 401(k) in a state with a 4.95 percent income tax and no retirement carve-out would hand roughly $2,475 to the state each year, while the same withdrawal in Florida, Texas or any of the other no-income-tax states keeps that full amount. Because federal income tax still applies to traditional-account withdrawals everywhere, and because state rules and rates change, retirees should verify current guidance from their state's department of revenue or a tax professional before making decisions based on these exemptions.

This article is for informational purposes only and does not constitute investment advice.