State Income Tax on Pension Income (2026): Which States Don't Tax Pensions?

State income taxes can cost a pension retiree $3,000–$10,000 per year — or nothing at all, depending on where you live. For a $48,000/year pension annuity in California vs. Florida, the cumulative difference over 25 years can exceed $100,000. Here is where every state stands in 2026, and how to factor state taxes into the lump sum vs. annuity decision.

Why state income tax matters for pension decisions

Most pension decision analysis focuses on federal taxes — and rightly so, since federal income tax dominates the picture. But state tax can shift the lump sum vs. annuity math in two important ways:

1. It changes the after-tax value of your annuity payments. A $4,000/month pension annuity is worth $3,468/month net in California (top marginal rate 13.3%) but $4,000/month net in Florida. Over 25 years, that gap is roughly $160,000.
2. The lump sum rollover and annuity are often taxed differently at the state level. Several states exempt income from a pension plan directly but tax IRA withdrawals (or vice versa). Rolling a lump sum to a traditional IRA can unexpectedly shift your state tax exposure in retirement.

State tax categories at a glance

The 9 no-income-tax states

Nine states levy no individual income tax at all. All retirement income — pension annuity payments, IRA and 401(k) withdrawals, Social Security, dividends, interest — is exempt from state income tax:¹

• Alaska
• Florida
• Nevada
• New Hampshire (taxes only interest and dividends; wages and pension income are not taxed)
• South Dakota
• Tennessee
• Texas
• Washington (has a 7% capital gains tax on long-term gains above $270,000, but this does not apply to pension or retirement account distributions)
• Wyoming

If you retire to any of these states, the lump sum vs. annuity decision is made entirely on federal tax and investment logic — state income tax is off the table.

States that fully exempt pension income

Alabama

Alabama fully exempts qualified pension income from state income tax — including public pensions, private defined-benefit plan distributions, military retirement pay, and IRA and 401(k) distributions.² Alabama has a graduated income tax (2–5%) on other income, but pension and retirement income sits entirely outside it.

Hawaii

Hawaii does not tax pension income from public or private defined-benefit plans. The one exception: if you made after-tax contributions to your pension, the portion attributable to those contributions is taxable.¹ Most traditional corporate and government pension recipients owe no Hawaii state tax on pension distributions.

Illinois

Illinois charges a flat 4.95% income tax rate — but it fully exempts retirement income, including distributions from qualified pension plans, 401(k) plans, IRAs, and annuity distributions from qualified plans.¹ This is a meaningful benefit: a $60,000/year pension in California at 9.3% marginal rate costs $5,580/year in state tax that an Illinois retiree avoids entirely.

Iowa

Iowa eliminated state income tax on retirement income for residents 55 and older as part of a 2022 tax reform, fully phased in starting with tax year 2023.¹ Qualifying income includes pension distributions, 401(k) and IRA withdrawals, and Social Security. Residents under 55 with pension income should check current Iowa Department of Revenue guidance.

Michigan (2026 change)

Michigan phased out its state income tax on pension and retirement income over several years, with the change fully effective for 2026 returns.¹ In 2026, most pension income, 401(k) and IRA withdrawals, and annuity income is exempt up to $67,610 for single filers and $135,220 for married couples filing jointly. This is a significant 2026 change for Michigan retirees — income above those thresholds may still be partially taxable; verify with the Michigan Department of Treasury.

Mississippi

Mississippi does not tax income from qualified pension plans, 401(k) distributions, IRA withdrawals, or Social Security benefits.¹ Mississippi does have a flat 4% income tax on other income above $10,000. For pension retirees, the state's retirement income exemption is effectively total.

Pennsylvania

Pennsylvania has a 3.07% flat income tax — but it fully exempts pension income from qualified plans, 401(k) and IRA distributions, and Social Security benefits from state tax.¹ Pennsylvania's combination of low flat rate and total pension exemption makes it one of the most favorable states for pension retirees who aren't ready to move to a no-income-tax state.

States with partial pension exemptions

Colorado

Colorado offers an age-based pension and retirement income exclusion: up to $20,000 for those under age 65, and up to $24,000 for those age 65 and older.³ Colorado's income tax rate is 4.4% (2026). For a $48,000/year pension, a 65-year-old exempts $24,000 and pays tax on $24,000 — a state tax bill of roughly $1,056/year, compared to $0 in a full-exemption state and much higher in California.

Georgia

Georgia provides a retirement income exclusion of $35,000 per person for ages 62–64, and $65,000 per person for ages 65 and older.⁴ "Retirement income" includes pension payments, Social Security, dividends, interest, capital gains, and up to $4,000 of earned income. Married couples can each claim the exclusion separately, making the joint cap $130,000 for couples both age 65+. Georgia's income tax rate is a flat 5.39% (2026). Most pension retirees at reasonable income levels pay little or no Georgia income tax.

New York

New York excludes up to $20,000 of pension and annuity income from state tax for those age 59½ and older.¹ Government pensions (federal civil service, New York state and local government) are fully exempt with no dollar cap. Military pensions are also fully exempt. Private pension income above $20,000 is taxed at New York's graduated rates (4% to 10.9%). For a FERS or CSRS retiree, New York effectively has no state income tax on pension income.

New Jersey

New Jersey excludes pension and retirement income for lower-income retirees. The maximum exclusion is $100,000 for married couples or $75,000 for single filers, but phases out completely if household income exceeds $150,000.¹ For middle-income pension retirees, this is meaningful. For higher-income retirees or those with large IRA balances driving total income above $150,000, the exclusion disappears entirely.

Kentucky

Kentucky excludes up to $31,110 per person in pension and retirement income.¹ At Kentucky's flat 4% income tax rate, this saves pension retirees up to $1,244/year per person. Government pensions (federal, state, and local) have historically received full exclusions; confirm with the Kentucky Department of Revenue for your specific pension type.

Virginia

Virginia exempts Social Security income and provides a modest retirement income deduction of up to $12,000 per person for age 65 and older.³ Virginia's top income tax rate is 5.75%. For large pension income, Virginia offers relatively little shelter; retirees with pensions above $12,000 pay Virginia income tax on most of it.

States with no meaningful pension exemption

Several states tax pension income essentially like ordinary income, with no broad retirement income exclusion:

• California: No general pension income exemption. State income tax rates run 1%–13.3% (highest in the country). A $60,000/year pension annuity generates roughly $4,000–$5,580 in California state income tax per year depending on total income and filing status. California is also notable for not recognizing rollovers as fully tax-deferred in some contexts — verify with your CPA if your rollover involves employer stock or special elections.
• Minnesota: Minnesota taxes most pension income at ordinary income rates (5.35%–9.85%). The state does exempt Social Security for lower-income filers (phaseout begins around $75,000 AGI for joint filers), but private pension income receives no general exclusion.
• Connecticut: Connecticut taxes pension income at ordinary income rates (2%–6.99%). Some Social Security exemptions apply at lower income levels, but pension income is broadly subject to Connecticut income tax.
• Montana: Montana taxes pension income at ordinary rates (1%–6.75%). A partial retirement income deduction phases out at higher incomes.
• Vermont: Vermont taxes pension income at ordinary rates (3.35%–8.75%). Social Security partial exemption applies at lower incomes; pension income has no broad exclusion.

Government pensions vs. private pensions: the hidden distinction

Many states treat government pension income more generously than private pension income. This reflects political and historical factors — many state government employees contributed to their own pension systems. The practical effect:

• Federal employees (FERS/CSRS): Nearly all states that have any pension exemption at all exempt federal civil service pensions. Even states like California, which has no general pension exemption, exempts military retirement pay. Federal pensions in New York are fully exempt (while private pensions above $20,000 are taxed).
• State and local government pensions: Many states exempt their own state and local government pensions entirely — even states that do tax private pensions. Illinois fully exempts private and public pensions, but many other states are more selective.
• Military retirement: More than 40 states now provide full or substantial exemptions for military retirement pay. States that previously taxed it (like Connecticut, Vermont, and others) have largely phased in exemptions. Verify your state's current rules if you're a military retiree.
• Private/corporate pensions: These receive the most variable treatment. Kiplinger identifies 16 states that don't tax private pensions in 2026; many others have partial or no exemption.¹

How state tax factors into the lump sum vs. annuity math

Two scenarios where state taxes materially affect the decision:

Scenario 1: You stay in a high-tax state

You're a California resident. You have a $900,000 lump sum offer or $4,200/month ($50,400/year) annuity.

• If you take the annuity: ~$4,600–$6,500/year in California state income tax on the annuity payments (varies by total income).
• If you roll the lump sum to a traditional IRA: future RMDs will also be taxable in California at the same rates. California does not exempt IRA distributions.
• Conclusion: In California, the state tax treatment of annuity vs. IRA RMDs is roughly equivalent. The decision should be made primarily on federal tax efficiency, investment return assumptions, and longevity — not California state tax differences between the options.

Scenario 2: You plan to move to a no-tax state

You're currently in Ohio (4% flat tax, limited pension exemption) and plan to retire to Florida within 2 years. You have a $750,000 lump sum offer or $3,600/month ($43,200/year) annuity.

• If you take the annuity and move to Florida: $0 state income tax on the annuity for life.
• If you roll the lump sum and take RMDs in Florida: $0 state income tax on RMDs for life.
• The state tax impact of this decision is $0 in either case — once you're a Florida resident, neither option is taxed at the state level. The decision is made purely on federal tax and investment return logic.

Scenario 3: Rolling to an IRA in a "pension-exempt" state

You're an Illinois resident. Illinois exempts qualified pension plan distributions but also exempts IRA withdrawals — so rolling your lump sum to a traditional IRA doesn't change your Illinois tax exposure. However, a retiree in a state that exempts "pension income" but NOT IRA distributions should model whether rolling over triggers a permanent state tax cost.

Retirement relocation: the state tax arbitrage

For pension retirees with large benefit streams, moving to a no-income-tax or pension-exempt state before retirement is one of the highest-value financial moves available. Consider:

• A $5,000/month ($60,000/year) pension subject to 9.3% California marginal rate costs $5,580/year in California state income tax.
• Moving to Nevada, Texas, or Florida saves $5,580/year — or roughly $138,000 over 25 years in today's dollars.
• Add IRA distributions (or Social Security in states that tax it), and the savings can be substantially larger for high-income retirees.

The relocation decision involves trade-offs beyond taxes: cost of living, healthcare access, proximity to family, estate planning implications, and property tax regimes. But for pension retirees with $50,000+ in annual pension income, state income tax is rarely a trivial line item.

If you're planning a retirement relocation, the lump sum vs. annuity decision should be modeled against where you'll be living — not where you are today.

Sources

1. Kiplinger — 16 States Don't Tax Pension Income in 2026. Comprehensive state-by-state coverage of pension income exemptions, including no-income-tax states, full-exemption states, and partial-exemption states. Used for state classifications and treatment summaries throughout this guide.
2. Alabama Department of Revenue — Income Exempt from Alabama Income Taxation. Alabama exempts qualified pension plan distributions, IRA and 401(k) distributions, and military retirement pay from state income tax.
3. Kiplinger — Retirement Taxes: How All 50 States Tax Retirees. Source for Colorado ($20,000/$24,000), Virginia ($12,000), and other partial-exemption state details used in this guide.
4. Georgia Department of Revenue — Retirement Income Exclusion. Georgia's official retirement income exclusion: $35,000 per person age 62–64, $65,000 per person age 65+. Each spouse qualifies independently.
5. AARP — 15 States Don't Tax Retirement Pension Payouts. Additional reference for states with pension income exemptions.

State tax rules verified against 2026 sources. State tax law changes frequently — confirm current rules with your state's department of revenue or a CPA before making rollover or relocation decisions. Values current as of May 2026.