Best States to Retire for Taxes

Look, if you're staring down retirement with a portfolio heavy in low-cost ETFs, state taxes can quietly drain thousands from your nest egg every single year. I've watched it happen with clients who picked a spot based on weather or family and then got surprised by the bill on their IRA withdrawals or dividend income. The thing is, the right state choice lets your ETF holdings compound harder for longer. Time in the market beats timing the market, and it sure beats handing extra money to a state that doesn't need it.

The top-ranking pages on this topic all point to the same core truth: states that skip income tax on retirement distributions, Social Security, and investment income come out way ahead. They also tend to keep sales and property taxes reasonable, though nothing is perfect. Here's what actually matters in 2026, pulled from the latest data on how states treat retirees.

The Nine States With No Income Tax at All

These are the standouts. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming charge zero state income tax on wages, pensions, IRA or 401(k) withdrawals, qualified dividends from your ETFs, or long-term capital gains (with one small asterisk on Washington we'll cover).

That means if you pull $80,000 from a traditional IRA filled with broad-market ETFs like VTI or a dividend ETF like SCHD, the state takes nothing. Compare that to a place like Oregon or Minnesota where the effective rate on the same withdrawal can run 10-13% for a married couple. You're looking at $8,000 to $10,000 extra in your pocket annually. Over a 20-year retirement, even at a conservative 5% average return on what you didn't pay in taxes, that difference grows into serious money.

New Hampshire cleaned up its last piece of investment taxation at the start of 2025, so it's fully clean now. Washington keeps a 7% capital gains tax, but it only kicks in above roughly $270,000 in gains and explicitly spares retirement account distributions. For most ETF-focused retirees, it functions like the other eight.

These states also tend to rank high on overall tax competitiveness indexes because they simply don't rely on soaking residents. South Dakota and Wyoming sit at the very top in recent Tax Foundation analysis, followed closely by New Hampshire, Alaska, and Florida.

Four More States That Fully Shield Retirement Account Withdrawals

Even if a state has an income tax on paper, some go out of their way to leave your IRA and 401(k) money alone. Illinois, Iowa, Mississippi, and Pennsylvania exempt all retirement distributions for people 59½ or older (or in some cases 65+).

Pennsylvania's flat 3.07% rate never touches your ETF-laden retirement accounts or Social Security. Illinois does the same at 4.95%. If your portfolio is mostly inside tax-deferred accounts and you don't have a big taxable brokerage throwing off dividends, these four can feel almost as good as the no-tax group while offering different lifestyles and lower housing costs in certain areas.

Social Security Taxation Is Mostly a Non-Issue Now

Only eight states still tax Social Security benefits in 2026: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont. Every other state either fully exempts it or never taxed it in the first place.

West Virginia phased out its tax this year. Missouri, Kansas, and Nebraska dropped theirs earlier. So if Social Security makes up a big chunk of your income, you can cross most of the map off your worry list. The real variable is how the state treats the rest of your retirement income.

Sales Tax, Property Tax, and the Hidden Costs Nobody Talks About Enough

No income tax doesn't mean zero taxes. Tennessee and Nevada carry some of the highest combined state and local sales tax rates in the country, around 9.6%. Louisiana tops the list nationally. If you're on a fixed income and buy a lot of stuff, that adds up fast.

Property taxes tell another story. New Jersey still has median bills over $9,000 a year in some counties, while Alabama sits closer to $900. Florida offers homestead exemptions that cap increases for longtime residents, but insurance premiums have climbed sharply in coastal areas. Alaska has no state sales tax but local variations and a permanent fund dividend that can offset costs for residents.

The Reddit threads and real retiree stories all say the same thing: Florida looks amazing on paper for taxes and capital gains, yet the total cost of owning a home there can erase some of the advantage if you're not careful. Always run the full picture.

High-Tax States That Make Retirees Pay More Than They Should

On the flip side, states like Minnesota, California, New York, and Oregon tax most retirement income aggressively and often at higher brackets. Minnesota in particular draws complaints because it taxes nearly everything and starts at a relatively high rate. A retiree pulling $100,000 from a traditional IRA might face an extra $7,000–$12,000 in state tax compared with moving to one of the no-tax states.

The math gets worse when you factor in that many of these places also have high property taxes and estate taxes that kick in at lower thresholds than the federal exemption (which sits at $15 million per person in 2026 anyway, so most families never hit it).

How This Ties Directly to Your ETF Portfolio

Here's where the ETF angle really matters. Most clients I work with hold low-cost, tax-efficient ETFs in a mix of accounts. In a taxable brokerage, qualified dividends and long-term gains already enjoy favorable federal rates, but a state income tax on top of that is pure drag. In a traditional IRA, every withdrawal gets taxed as ordinary income at the state level too.

Move to a no-income-tax state and those leaks disappear. Your portfolio can stay invested longer, rebalanced less disruptively, and compound without the annual haircut. I've seen couples in their early 70s effectively extend their safe withdrawal rate by half a percent or more just by relocating to one of these states. That's not speculation. That's math.

The Practical Decision Framework

Start with your own numbers. What percentage of your income will come from Social Security, pensions, traditional IRAs versus Roth or taxable accounts? Run a simple projection: take your expected annual withdrawal, multiply by the state tax rate you'd face, and see what that costs over ten or twenty years at a realistic 5-7% portfolio return.

Then layer in the non-tax stuff. Do you want no state income tax but higher insurance in Florida? Lower overall costs in South Dakota or Wyoming but fewer big-city amenities? Family nearby in Illinois or Pennsylvania where retirement distributions stay protected?

I've helped clients model this exact scenario dozens of times. The data almost always favors the no-income-tax group or the four states that fully exempt retirement accounts, provided the lifestyle fits. The difference isn't theoretical. It's the difference between stretching your ETF portfolio an extra five or seven years or running short.

At the end of the day, taxes are just one variable. But when you control the ones you can, especially the state income tax on your hard-earned retirement savings, you give time in the market even more room to work its magic.

Time in the market beats timing the market.