Imagine retiring early and keeping more of every dollar. This early retirement tax guide shows how choosing the right state can lower taxes on 401(k), IRA, pension, and investment income so your money lasts longer. That’s real retirement tax savings—see how it fits into the bigger plan in our financial independence and early retirement guide.
This guide highlights the most low-tax states for early retirees and explains healthcare trade-offs. Use the interactive tool below to match states to your income sources and budget, then decide whether you qualify and what to do next.
Heads up: State and local rules vary by county/city and change often. Check official sources and consider a licensed tax pro for your situation.
Interactive State Tax Comparison Tool
Compare states by early-retiree taxes—select your age, income sources, and budget to see low-tax matches for your situation.
Top Matches for Your Situation
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Table of Contents
- Key Takeaways for Early-Retiree Taxes
- Understanding Early Retirement Tax Basics
- Top States with No Income Tax for Early Retirement
- States with Retirement Income Tax Exemptions
- Seeing the Full State-Tax Picture for Early Retirees
- Cost of Living Beyond Taxes
- 7 Best States for Low Taxes in Early Retirement
- Interactive State Tax Comparison Tool
- Key Considerations for Pre-Medicare Retirees
- Annual Early Retirement Tax Review
- Frequently Asked Questions
- Conclusion: Plan Your Tax Strategy for Early Retirement
Key Takeaways for Early-Retiree Taxes
- State Taxes Impact Savings: Relocating to low-tax states can save thousands across income, property, and sales taxes.
- No Income Tax Isn’t Everything: States like Florida or Wyoming skip income tax, but property or sales taxes can offset savings.
- Retirement Income Exemptions: Some income-tax states (e.g., Pennsylvania) often exempt 401(k)s, IRAs, and pensions.
- Healthcare Costs Matter: Pre-Medicare retirees should compare ACA options and local providers.
- Holistic Approach: Balance income tax, property tax, sales tax, cost of living, and healthcare.
Understanding Early Retirement Tax Basics
Taxes can feel like a maze, but they’re worth decoding if you want to retire early without stress. Sound familiar? If you’re retiring before Medicare, your money might come from 401(k)s, IRAs, capital gains, or pensions, and each state taxes these in its own way. Property and sales taxes also affect your day-to-day budget. Knowing the rules helps you keep more of your savings, especially when comparing state retirement taxes.
How States Tax Retirement Income
States set their own income tax rules. Some skip income tax entirely. Others reduce tax on retirement income. Here’s the short version:
- 401(k) and IRA Withdrawals: Usually taxed as ordinary income in states with income tax; Pennsylvania often exempts these.
- Pensions: Often partially or fully exempt, especially in states like Mississippi.
- Capital Gains: Taxed as ordinary income in many states; Washington has no earned-income tax.
- Social Security Benefits: Most states don’t tax these.
- Rental Income: States without income tax, like Texas, don’t tax it; others treat it as ordinary income.
Property and Sales Taxes: Hidden Costs
Income tax isn’t the whole story—property and sales taxes can quietly pile up and change your budget more than you’d expect. In Texas, an average 1.68% property rate can blunt the no-income-tax win. In Tennessee, a ~9.5% sales tax raises everyday costs.
“Focusing only on income tax is a mistake. Property and sales taxes can quietly erode your savings, making a ‘tax-friendly’ state costly.”
Top States with No Income Tax for Early Retirement
Nine states have no state income tax, which helps you keep more of your retirement cash. Other taxes and costs vary, so here are highlights:
Alaska: The Frontier Tax Haven 🐻❄️
- Income Tax: None, so 401(k)s and capital gains aren’t taxed at the state level.
- Sales Tax: No state sales tax; local rates average around 1.8%.
- Property Tax: Moderate (about 1.2% avg.); senior exemptions often available post-65.
- Perks: Permanent Fund dividend; no tax on retirement income.
- Considerations: Higher living costs, harsh winters, limited healthcare.
Florida: Sunshine and Tax Savings ☀️
- Income Tax: None, ideal for low-tax retirement planning.
- Sales Tax: 6% state, higher with local add-ons.
- Property Tax: Moderate to high (~0.8% avg.); homestead exemptions can help.
- Perks: Warm climate, retiree-friendly communities.
- Considerations: High property insurance, hurricane risks.
Nevada: Desert Tax Relief 🎰
- Income Tax: None, saving on retirement income.
- Sales Tax: Higher (around 8%+ combined).
- Property Tax: Low (~0.55% avg.).
- Perks: Low property taxes, dry climate.
- Considerations: Hot summers, water scarcity.
South Dakota: Quiet Win Among Tax-Friendly States 🏞️
- Income Tax: None.
- Sales Tax: Moderate (~6%+ avg.).
- Property Tax: Moderate (~1.1% avg.).
- Perks: Lower cost of living, natural beauty.
- Considerations: Harsh winters, rural areas.
Tennessee: Music and Low Taxes 🎸
- Income Tax: None (since 2021), tax-free retirement income.
- Sales Tax: High (~9.5% avg.).
- Property Tax: Low (~0.7% avg.).
- Perks: Vibrant culture, low property taxes.
- Considerations: High sales tax, humid summers.
Texas: Big State, Big Tax Trade-Offs 🤠
- Income Tax: None.
- Sales Tax: Moderate to high (up to ~8%+ combined).
- Property Tax: High (~1.7% avg.).
- Perks: Diverse geography, strong economy.
- Considerations: High property taxes, hot summers.
Washington: Evergreen Tax Benefits 🌲
- Income Tax: None on earned income. Note: Washington imposes a 7% capital gains excise tax on certain long-term capital gains (income thresholds apply).
- Sales Tax: High (~9%+ avg.).
- Property Tax: Moderate (~0.9% avg.).
- Perks: Beautiful environment.
- Considerations: Estate tax applies; higher cost of living in major cities, rainy winters.
Wyoming: A Top Tax Haven for Early Retirees 🏔️
- Income Tax: None.
- Sales Tax: Low (~5.3% avg.).
- Property Tax: Very low (~0.6% avg.).
- Perks: Low overall tax burden, scenic beauty.
- Considerations: Harsh winters, rural lifestyle.
New Hampshire: Tax-Free Income, High Property Costs 🌳
- Income Tax: No tax on wages; interest/dividends tax fully repealed as of 2025.
- Sales Tax: None.
- Property Tax: High (~1.9% avg.).
- Perks: No tax on 401(k)/IRA withdrawals; no sales tax.
- Considerations: High property taxes, cold winters.
States with Retirement Income Tax Exemptions
Some income-tax states offer exemptions that make them strong picks. For example, Pennsylvania often exempts most retirement income, which can meaningfully lower taxes.
Pennsylvania: Retirement Income Haven 🔔
- Income Tax: 3.07%, but most retirement income (401(k)s, IRAs, pensions) is typically exempt.
- Sales Tax: Moderate (6% state).
- Property Tax: Moderate to high (~1.6% avg.).
- Perks: Broad retirement income exclusions.
- Considerations: Higher property taxes in some counties.
Mississippi: Low-Cost Tax Gem 🌸
- Income Tax: Retirement income (401(k)s, IRAs, pensions) is generally exempt.
- Sales Tax: High (around 7% state; more with local).
- Property Tax: Very low (~0.65% avg.).
- Perks: Low property taxes, affordable living.
- Considerations: Higher sales tax; humid summers.
Alabama: Pension-Friendly State 🐘
- Income Tax: Pensions and Social Security are typically exempt; 401(k)/IRA may be partially taxable.
- Sales Tax: High (~9%+ avg.).
- Property Tax: Very low (~0.4% avg.).
- Perks: Low property taxes; pension exemptions.
- Considerations: Higher sales tax; storm risks on the coast.
Arizona: Desert Tax Advantages 🌵
- Income Tax: Flat 2.5%; limited pension exclusions.
- Sales Tax: Moderate to high (~8%+ avg.).
- Property Tax: Low (~0.6% avg.).
- Perks: Low property taxes; warm, dry climate.
- Considerations: Very hot summers; modest income tax still applies.
Seeing the Full State-Tax Picture for Early Retirees
Choosing low-tax states isn’t just about low income taxes. For example, Texas’s high property taxes can cost homeowners thousands per year, offsetting no-income-tax benefits. Here’s a simple comparison:
| State | Income Tax | Property Tax (Avg. %) | Sales Tax (Avg. %) |
|---|---|---|---|
| Wyoming | None | 0.61% | 5.36% |
| Florida | None | 0.83% | 7.5% |
| Texas | None | 1.68% | 8.25% |
| Pennsylvania | 3.07% (retirement often exempt) | 1.58% | 6% |
| Mississippi | (retirement generally exempt) | 0.65% | 8.5% |
Figures above are simple statewide averages where available. Local rates vary and change over time—verify current numbers with official sources before deciding.
Property Taxes: Annual Home Costs
Property taxes fund local services but vary widely. States like Alabama (~0.4%) and Wyoming (~0.6%) keep costs low, while New Hampshire (~1.9%) and Texas (~1.7%) are higher.
- Low Property Tax States: Alabama, Mississippi, Wyoming, Arizona.
- High Property Tax States: New Jersey, Illinois, New Hampshire, Texas.
Sales Taxes: Daily Expenses
Sales taxes touch most purchases. Delaware and New Hampshire have no state sales tax, while Tennessee and Louisiana are among the highest.
“A balanced retirement strategy considers income, property, and sales taxes to maximize savings.”
Cost of Living Beyond Taxes
Taxes are one part of the picture. In high-cost states, housing and insurance can erase tax wins. Consider housing, utilities, groceries, and healthcare. Wyoming offers low taxes and affordable homes, but its rural setting may mean fewer services nearby. If you’re flexible on location, you can also look at the best cities for financial independence by 50 to see how lifestyle and tax trade-offs line up.
The 7 Most Tax-Friendly States for Early Retirement
Seven standouts balance taxes and everyday costs: Wyoming (no income tax; low sales and property taxes), Tennessee (no income tax; low property taxes; higher sales tax), Florida (no income tax; watch insurance costs), South Dakota (no income tax; lower cost of living), Arizona (low property taxes; modest income tax), Pennsylvania (often exempts most retirement income), and Mississippi (generally exempts 401(k)s, IRAs, and pensions with very low property taxes).
Key Considerations for Pre-Medicare Retirees
Healthcare Costs Before Medicare
Healthcare is a major expense for pre-Medicare retirees. ACA marketplace premiums vary by state and income. Compare subsidies and provider networks. The IRS explains ACA tax credits you can use to estimate costs. For plan design, coverage options, and example premiums, walk through our guide to health insurance options for early retirees.
Sorting ACA choices before Medicare? Start here:
Establishing Residency for Tax Benefits
To claim a state’s tax benefits, establish legal residency by spending 183+ days there, updating your license and voter registration, changing banking and mailing addresses, and filing a Declaration of Domicile when required.
Part-Year Residency and Estate Taxes
If you move mid-year, you may need to file part-year returns in both states. Also review state estate or inheritance taxes, which can affect beneficiaries.
Lifestyle and Community Factors
Think about what makes you happy: climate, proximity to family, activities, and safety. Florida offers sunny beaches, while Wyoming suits hikers and outdoors lovers.
Annual Early Retirement Tax Review
Tax rules shift over time (for example, New Hampshire’s interest and dividends tax is now repealed). Review your plan each year and talk with a tax advisor before big moves. If ACA subsidies are part of your plan, pair that review with our ACA for early retirement guide so you don’t miss enrollment or income threshold changes.
Frequently Asked Questions
Conclusion: Plan Your Tax Strategy for Early Retirement
Use the tool, shortlist a few states, and run the numbers with a pro before you move. Run numbers for your income and assets. A little planning now can mean a lot more breathing room later. 🏖️
This article isn’t financial, legal, or tax advice. Verify current rules with official state sites or a qualified professional.
