States with Special Breaks for Retirement Income

Some of the best states for retirees are not those with zero income tax, but those that have an income tax and specifically choose to give seniors a break. These states understand that retirees are often on a fixed income and have structured their tax codes to protect retirement savings.

Pennsylvania

The Keystone State might be a surprise on this list, but its tax code is remarkably friendly to retirees. Pennsylvania has a flat state income tax, but it exempts nearly all forms of retirement income for residents age 59.5 and older. This includes distributions from 401(k)s, 403(b)s, IRAs, and both public and private pension plans. Social Security benefits are also untaxed.

The Trade-Off: Property taxes in Pennsylvania are higher than the national average and can vary significantly by school district. Additionally, some municipalities levy their own local earned income tax, which could affect you if you plan to work part-time. Pennsylvania also has an inheritance tax, although the rate is 0% for transfers to a surviving spouse and relatively low for children and direct heirs.

Who it’s good for: Pennsylvania is an excellent choice for retirees with substantial savings in tax-deferred accounts like 401(k)s and traditional IRAs. You can draw down those accounts without paying any state income tax, which is a massive benefit.

Mississippi

Mississippi is another state that rolls out the welcome mat for retirees through its tax code. It exempts all qualified retirement income from state taxation. This includes Social Security, IRA and 401(k) withdrawals, and both public and private pensions. Combined with a very low cost of living, Mississippi can be an extremely affordable place to retire.

The Trade-Off: Mississippi has one of the highest sales tax rates in the nation, and it is one of the few states that applies its full sales tax rate to groceries. This can be a significant budget factor for many households. While property taxes are among the lowest in the U.S., the overall tax system is less progressive than in other states.