With so many factors to consider, choosing where to live in retirement is never an easy decision. The top priorities for those contemplating retired life often include the desire to live in close proximity to family and friends, relocate to a place with warmer temperatures, reduce housing expenses, and have access to quality healthcare—mixing and matching these as needed.

While the aforementioned criteria are admirable, one oft-overlooked consideration is taxes. As the total state and local tax burden is often thousands of dollars more per year in one state versus another, gaining a high-level understanding of your potential tax bill—especially if your retirement funds are limited—is critical and should factor into your decision-making process.

The most tax-friendly states aren’t the same for everyone

The list of the most tax-friendly states will, to an extent, vary based on a retiree’s individual financial circumstances and involve several variables: such as retirement income sources, income dollar amount, and the value of assets left to heirs.

The Social Security Administration recently claimed that 21% of married couples (and about 45% of unmarried persons) rely on Social Security for 90% or more of their income. If you fall into this category during retirement, the most tax-friendly states from your perspective are perhaps those that don’t tax Social Security income—especially if you lack significant assets to leave to your heirs.

In this scenario, you’ll enjoy a broader selection of retirement options as most states currently don’t tax Social Security benefits: with only Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont currently doing so to varying degrees.

States that won’t tax your retirement income

You’ve worked so hard to build your retirement nest egg and want to pay as little in taxes as necessary when it’s time to access your retirement funds. Fortunately, some states (seven, to be exact) don’t tax retirement income at all. In fact, they also don’t charge state tax on any other income—an important consideration for retirees who may want to pursue work of some sort—nor do they levy any estate or inheritance taxes, allowing you to leave more to your heirs.

For those keeping track at home, these are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming; tax collectors won’t come after a single penny in these states if you take a distribution from your IRA or 401(k) or receive Social Security benefits, a pension, or even generate investment income (though federal taxes still apply). These specific locations therefore shine through as the most tax-friendly areas for the needs of many retirees.

Browse the Internet and you may also see Illinois, Iowa, Mississippi, Pennsylvania, and Washington State pop up on “most tax-friendly” lists. While we can’t argue against this, we left them out of our top seven as they’re perhaps not as friendly for some retirees.

While Illinois doesn’t tax retirement income, the state does have a flat 4.95% tax on earnings from other sources such as investment income. Most retirement income is now tax-exempt in Iowa for retirees age 55 and older, meanwhile, but other types of income (wages and investments) are in fact taxed—with the state moving to a flat tax rate of 3.9% in 2026. Social Security benefits, 401(k) and IRA distributions, and pensions are exempt from Mississippi’s 5% flat tax, which is scheduled to drop to 4% by 2026; however, residents will still pay taxes on any other income exceeding $10,000. Pennsylvania also doesn’t tax the aforementioned distributions, with all other income types taxed at a flat rate of 3.07%.

Finally, while Washington doesn’t tax Social Security or pension income nor 401(k) or IRA distributions, a 7% tax applies to the sale of various assets such as stocks and bonds (on annual gains exceeding $250,000). The state also imposes an estate tax (10%–20%) on those exceeding $2.193 million.

Other taxes to consider during retirement

Housing costs—including mortgage, rent, property tax, insurance, maintenance, and repair fees—represent the largest expense for retirees. More specifically, the average retiree household pays an average of $20,362 per year ($1,697 per month) on housing expenses: representing over 35% of annual expenditures. To help minimize these expenses, it’s important to consider property taxes when determining where you want to retire.

Based on effective real estate tax rates (per WalletHub), Hawaii, Alabama, Colorado, Nevada, South Carolina, and Louisiana have the lowest property tax rates in the nation. The seven states mentioned earlier rank as follows: Nevada (#4), Wyoming (#11), Tennessee (#15), Florida (#24), Alaska (#34), South Dakota (#35), Texas (#46). You’ll also want to review average dollar amounts based on median home values (available on the same website) to nail down a ballpark number of what you’re likely to spend in this regard.

As for the other side of the coin? Based on property taxes alone, New Jersey is the worst state to retire in. The Garden State taxes at a 2.47% rate, with the average property tax bill in NJ ringing in at a whopping $9,569 (based on recent data published by the state): ranking highest in the nation.

For those of you who are (or will be) on a fixed income, every dollar counts—which is precisely why you may also want to review sales tax rates as you’ll likely spend a large portion of that income on taxable items. Note that five states don’t have statewide sales taxes: Delaware, Montana, New Hampshire, Oregon, and Alaska (which does allow local governments to charge sale tax, however). Per the Tax Foundation’s most recent data, Alaska (1.82%), Hawaii (4.50%), Wyoming (5.44%), Maine (5.50%), and Wisconsin (5.69%) charge the lowest combined rates.

Where people are retiring

If you aren’t a numbers person, perhaps it’s easier to simply identify where most retirees are settling down—and research why! To give you a jump start, we crunched the numbers based on five years of SmartAsset data; to the surprise of absolutely no one, Florida is (and remains) the most popular retirement destination in the United States. It’s not even close.

The data, meanwhile, says that a total of 843,965 people aged 60+ were represented in their “top 10 retirement destinations” study (with locations varying slightly each year). About 44% of retirees within this group ended up in the state of Florida, which is an ongoing trend. To illustrate the disparity between states, Arizona—the second-most popular retirement destination—saw a positive net migration of 146,574 (17.4%) retirees across the five years of data we reviewed.

In sum: the most tax-friendly states for retirees

Choosing where to live during retirement isn’t always an easy process and requires a variety of financial (and emotional!) decisions. Hopefully, at the very least, the information shared in this post will arm you with additional insights to help you make a more informed decision.

Want to make sure you get the most out of your retirement? Schedule a FREE Discovery call with one of our CFP® professionals.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.