The 14 States That Won't Tax Your Pension

When it comes to making your pension go further during retirement, one of the best ways to stretch your dollars is of course to reduce expenses. There are a variety of approaches to cutting costs but perhaps few are as effective as simply moving to a state that does not tax pensions. After all, tax-free retirement income has a nice ring to it, doesn't it?

According to AARP, there are nine states that have no state income taxes at all—which would mean no taxes on your pension. An additional three states tax personal income but specifically exclude distributions from retirement plans such as 401(k)s, IRAs, and pensions. And there are two states that, while they don't tax pensions, will tax distributions from your 401(k) or IRA accounts. Here's a closer look at the options for living your best—and most financially-savvy—retirement life.

Alabama

There's a long list of income types that are exempt from taxation in the state of Alabama. These include state of Alabama teachers' retirement system benefits, state of Alabama employee's retirement system benefits, state of Alabama judicial retirement system benefits, military retirement pay, U.S. government retirement fund benefits, and yes, you guessed it, payments from a Defined Benefit Retirement Plan. Additional retirement benefit programs that are not taxed in Alabama include federal railroad retirement benefits and federal social security benefits. It's also worth noting that the state does not tax life insurance proceeds received because of a loved one's death.

Alaska

Alaska does not have a state income tax, meaning your retirement distributions would be free and clear of local taxes as a resident of The Last Frontier. There are no taxes on 401(k) or IRA distributions here either.

Florida

Florida has gone to great lengths to create a very favorable tax environment for retirees. There is no personal income tax in The Sunshine State. Translation: no taxes on Social Security, pension, IRA or 401(k) distributions. As an added bonus, Florida has also done away with estate and inheritance taxes.

Hawaii

The stunning scenery aside, Hawaii is a mixed bag for retirees. The state does not tax pension income, but it does tax distributions from 401(k) plans and IRAs.

Illinois

If you don't mind the brisk winters, Illinois may be another good choice for retirement. The state does not tax distributions from qualified employee benefit plans including 401(k) accounts, IRAs (this includes traditional IRA that has been converted to a Roth) and self-employed retirement plans. The state also exempts redemption of U.S. retirement bonds from taxes, and as well as government retirement or government disability, including military retirement benefits. Railroad retirement income is exempt from taxes in The Prairie State.

Mississippi

Mississippi is another particularly tax-friendly state for retirees. There are no taxes on pensions, IRA distributions, or 401(k) distributions in the Magnolia State.

Nevada

There's a reason so many retirees flock to Nevada—there's no personal income tax. That means no taxes on your pension, 401(k), or IRA. Social Security benefits are also not taxed in The Silver State.

New Hampshire

Just like Nevada, there is no state income tax in New Hampshire—allowing residents to make the most of their pension, 401(k), IRA, and Social Security benefits. Making this state even more budget-friendly, there is no sales tax, estate tax, or inheritance tax.

Pennsylvania

Another retiree-friendly choice, The Keystone State exempts pension income for seniors 60 and older from taxes. In addition, distributions from your 401(k) and IRA are tax-free, as is income from Social Security.

South Dakota

While the climate in South Dakota may not be ideal for retirees, the income tax regulations certainly are. There is no state income tax here. For retirees, that means not paying taxes on your pension, as well as Social Security, 401(k), or IRAs.

Tennessee

With no individual income tax on employer-sponsored retirement income or most other forms of income, The Volunteer State is another option to put on your list of considerations for cutting costs. This lenient tax policy includes distributions from IRAs, 401(k) plans, and even annuities.

Texas

The Lone Star state is certainly another option for retirees looking to cut costs. There is no income tax in the state, meaning your pension will be free and clear. The same holds true for your Social Security income, IRA, and 401(k) distributions.

Washington

Living in Washington, another state that has opted to simply not tax personal income, means you can pocket pension, Social Security, and all other forms of retirement income free and clear.

Wyoming

Last but not least, Wyoming does not tax personal income, which means that, as in many of the other states on this list, in Wyoming you will not pay taxes on any form of retirement income—including your pension.

How to decide where to move

Relocating to a state that does not tax pensions can certainly help your money go further during retirement, but you should consider all of the variables in your proposed retirement location, (not just a lack of pension taxes) and crunch the numbers carefully before making a final decision, says Sandy Higgins, a senior wealth advisor for Capstone Financial Advisors.

"While we would not necessarily suggest that someone choose a state to live in exclusively because of the tax implications, reducing your overall tax bill can have a significant impact on your retirement success," says Higgins.

"Of course, there should be other considerations in the overall income tax analysis," continues Higgins. "For example, a state's overall income tax rate, the tax treatment of Social Security income, and defined contribution plans such as 401(k) or IRA distributions, as well as the availability of various deductions or credits will also need to be part of the equation."

A state with a higher-than-average tax rate, for instance, could still end up being particularly tax-friendly if some of its other tax rules or financial benefits work well for your individual situation.

"Because of the complexity that could be involved, it's always a good idea to have a professional evaluate your individual circumstances," says Higgins.

Finally, there are other important considerations beyond tax regulations, when evaluating places to live. For example, the overall cost of living in a particular area can be very important when evaluating your retirement income and budget. In addition, available housing options, health care support and accessibility, cultural and recreational opportunities, weather, and diverse communities may also weigh into your evaluation.

"And while the state you choose in retirement may seem less expensive from a tax or cost of living standpoint, if it means traveling by air once a month to visit family, some of that cost savings is diminished," says Higgins.