Pension Tax by State 2026: Which States Don't Tax Pension Income

The best states to retire for pension tax purposes

The clearest wins are the nine states with no income tax. Florida, Texas, and Nevada get the most attention because they're large states with real infrastructure for retirees. Alaska and Wyoming have no income tax too, but the climate and remoteness put them on fewer retirement shortlists. New Hampshire is attractive for northeastern retirees who don't want to cross the country.

Beyond the no-income-tax states, four others fully exempt all retirement income: Illinois (4.95% flat rate, but pensions are completely untaxed), Mississippi, Pennsylvania, and Alabama. These are genuinely excellent for retirees with significant pension income. A Pennsylvania retiree with a $60,000 SERS pension pays zero state income tax on it. Same with Illinois.

Iowa made a big move in 2023. Pensions are now fully exempt for residents 55 and older. That puts Iowa in effectively the same category as the full-exemption states for most retirees. It's flying under the radar compared to Florida, but Iowa's cost of living is much lower and it's close to major cities for families spread across the Midwest.

Georgia deserves mention for the partial category. A $65,000 exemption for retirees 65 and older is substantial enough to cover most pension income. A retiree drawing $50,000 from their ERS Georgia pension owes zero state tax on it. Georgia also has a warm climate and lower property taxes than Florida in many counties.

Arizona's appeal is the combination: 100% government pension exemption, a flat 2.5% rate on everything else, and a dry climate that attracts retirees for other reasons too. Private pensioners only get a $2,500 exclusion, so the math is better for government workers, but the 2.5% flat rate is low enough that even fully taxable pension income doesn't cost much.

States to watch out for

California is the hardest case. A retiree with a CalPERS pension pays state income tax on every dollar at rates that can reach 13.3%. That's not a marginal rate most retirees hit, but even the 9.3% bracket starts at $68,350 for single filers. A $70,000 CalPERS pension puts you right into it. Compared to Florida or Nevada, the tax difference on a $70,000 pension is roughly $6,500 per year, every year.

New Jersey is complicated. The top marginal rate reaches 10.75%, and while there is a pension exclusion (up to $100,000 for those under certain income thresholds), many retirees find their Social Security, pension, and other retirement income pushes them above the threshold. New Jersey also has among the highest property taxes in the country, so the total tax burden compounds.

Minnesota and Oregon are both high-rate states with limited pension exemptions. A retired Minnesota state employee with a MSRS pension faces rates up to 9.85% on taxable income. Oregon tops out at 9.9%. Neither state offers a broad pension exclusion.

Connecticut applies its 6.99% rate to pensions above income thresholds, with partial exemptions below them. For a retiree with both a pension and Social Security, the interaction of the two income sources often pushes people into the taxable range.

Federal vs state pension tax

One thing that doesn't change regardless of where you live: federal tax. The IRS taxes pension income as ordinary income, subject to federal rates from 10% to 37%. There's no federal pension exemption analogous to what states offer. Your total federal tax on a $60,000 pension, as a single filer in 2026, works out to roughly $7,500 after the standard deduction. That federal bill is the same whether you're in Florida or California.

State tax sits on top of that. So the real question isn't just "does my state tax my pension" but "what's my combined federal and state tax on this income." A California retiree at 9.3% state plus 12% federal on the same dollars has an effective combined rate around 20% on pension income in that range. A Florida retiree in the same federal bracket owes 12% total.

Social Security is taxed under a different set of rules at both the federal and state level. At the federal level, up to 85% of Social Security benefits can be taxable depending on your combined income. Your pension counts toward that combined income calculation. Most states don't tax Social Security at all, even if they tax pension income. Only about 10 states tax Social Security benefits in any form.

How to reduce pension taxes

If you haven't retired yet and you have some flexibility, state of domicile is the single most powerful lever. Establishing residency in a no-tax state before your pension begins can save you five or six figures over a retirement. It's not just about forwarding your mail. You need a real address, a driver's license, voter registration, and you need to actually live there for most of the year. Some states are aggressive about auditing former residents who claim to have moved for tax purposes.

Roth conversion is a second tool. Traditional pension income is always taxable as ordinary income because it was never taxed going in. But if you have a supplemental 401(k) or IRA balance, converting some of that to a Roth before retirement creates tax-free income in retirement. That lets you fill lower tax brackets with pension income and draw from Roth for the rest, potentially keeping your total income below state exemption thresholds.

Timing matters too. If you retire mid-year, you might have both W-2 wages and pension income in the same tax year. That can push you into a higher bracket temporarily. Some retirees choose to retire in January rather than the middle of the year to avoid stacking income in one calendar year.

For the RMD side of retirement income, our RMD calculator can help you model required distributions from your TSP, IRA, or 401(k). Those withdrawals count as ordinary income and interact with your pension income and Social Security thresholds.

One more thing worth knowing: the state where you earned the pension doesn't follow the income. If you worked in California for 30 years and then retire to Nevada, Nevada's no-income-tax rule governs your pension income. The source state can only tax income that was earned when you were living there, and pension payments are generally considered income of the residence state under federal law (the Pension Source Tax Act of 1996).