5 Retirement Tax Layers Most People Completely Miss

If you are comparing the best states to retire in for taxes, the state income tax rate is where most people start and stop. That headline number can be very misleading. The state you choose can swing your total retirement tax bill by hundreds of thousands of dollars over a typical 25 to 30 year retirement.

This article covers five layers of state tax that affect retirees, plus sales tax.

Why a no income tax state is not always cheaper

There are 9 states with no broad based income tax, including Florida, Texas, and Tennessee. Moving to one can be the right call, and it can also be the wrong one.

Take two couples with the same $1.5 million portfolio and the same $90,000 a year spending plan. One retires in Tennessee and the other in Iowa, which has a 3.8% income tax on paper. After 25 years, the Iowa couple keeps more of their money. Tennessee has one of the highest combined sales tax rates in the country, and as of 2023 Iowa stopped taxing retirement income for residents 55 and older.

What matters is the effective rate on your specific income mix at your income level, after standard deductions and any retiree specific exemptions. That number is almost always lower than the headline rate.

Which states do not tax retirement income

Some states have a real income tax but do not tax most forms of retirement income:

• Illinois has a flat 4.95% tax on wages and 0% on retirement income, including 401(k) and IRA withdrawals, pensions, and Social Security.
• Pennsylvania has a 3.07% flat tax on wages and 0% on retirement income for residents who are at least 59 and a half.
• Mississippi taxes wages at a flat rate in the 4% to 5% range and does not tax retirement income.
• Iowa taxes wages at a flat 3.8% and exempts retirement income for residents 55 and older.

Ask how each state treats your own mix of IRA withdrawals, Roth withdrawals, Social Security, and pension income.

How property taxes offset income tax savings

A state that collects little income tax has to raise money somewhere, and often that is property tax. Hawaii has the lowest effective rate at roughly 0.27% of home value. At the other end, New Jersey is at 2.23%, Illinois at 2.08%, and Texas at 1.74%.

On a $400,000 home, that is around $6,960 a year in Texas and around $1,080 in Hawaii. The difference of roughly $5,880 a year is about $147,000 over 25 years. In some scenarios, a couple in Texas can owe more total state tax than a couple in South Carolina, even though Texas has no income tax.

Which states tax Social Security and pensions

Until very recently, around 13 states taxed at least some Social Security benefits. As of 2026 that list is down to a handful, and most of those offer exemptions and credits that mean the average retiree pays little to nothing. Check the current rules before relying on an older article.

Alabama, Hawaii, Illinois, Mississippi, and Pennsylvania are the states I most often see that do not tax pension income, even where they tax wages.

State estate and inheritance taxes

Most retirees do not come close to the federal estate tax exemption, but state exemptions are much lower. Oregon's is $1 million and Massachusetts is $2 million, and Washington, Minnesota, Illinois, Maine, and New York have estate taxes with higher exemptions. Kentucky, Nebraska, New Jersey, Pennsylvania, and Maryland charge inheritance taxes, and Maryland is the only state that charges both.

A couple with a $4 million estate in Oregon has $3 million exposed to the state estate tax. With a graduated structure and a top rate of 16%, the estate could owe around $400,000.

Sales tax and how much you spend

Five states, including Oregon, have no statewide sales tax. Tennessee and Louisiana average around 9.5% once local rates are added. On $50,000 a year of taxable spending, that is $0 in Oregon and around $4,775 in Tennessee. It matters less if most of your spending is on essentials, which most states exempt.

How to choose a state for retirement

• Taxes are only part of it. If a state saves you $5,000 a year and you spend $8,000 a year flying to see family, you have not saved anything.
• Flexibility helps. Some of the best plans I have built involve doing heavy Roth conversion years in a state that does not tax retirement income, then moving to a state with lower property and sales tax once income drops.
• Your biggest variable depends on you. For a paid off home it is property tax, for a large estate it is estate tax, and for heavy spending it is sales tax.

Common questions

Is it cheaper to retire in a state with no income tax?

Sometimes. A no income tax state can still cost more in total once property tax and sales tax are counted.

Which states do not tax 401(k) and IRA withdrawals?

Besides the states with no broad based income tax, Illinois, Mississippi, Pennsylvania, and Iowa exempt retirement income, with age requirements in Pennsylvania and Iowa.

Do I need to worry about state estate tax if I am under the federal exemption?

Possibly. State exemptions are much lower than the federal one, such as $1 million in Oregon.

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Ask 100 retirees about taxes and where to live, and almost all of them will land on the same comparison. New York versus Florida. New York's top state income tax rate is just under 11 percent. Florida's is zero. So on paper, a retiree pulling $150,000 a year from their accounts could save more than $10,000 a year in state income tax just by changing their address.

That is real money, and for plenty of retirees it is absolutely the right call.

But that comparison is also the easy one. The picture gets a lot more interesting once you compare states that are closer in tax profile, because that is where most retirees are actually choosing.

Here is an example that catches almost everyone off guard. Two couples, same $1.5 million nest egg, same $90,000 a year spending plan. One retires in Tennessee, a no income tax state. The other retires in Iowa, which has a 3.8 percent state income tax on paper. After 25 years, the couple in Iowa actually keeps more of their money.

That sounds backwards. Tennessee is in the no income tax club. Iowa is not. So how does the math flip?

Because Tennessee has one of the highest combined sales tax rates in the country. And because Iowa, as of 2023, stopped taxing retirement income entirely for residents 55 and older. So the headline tax rates and the rates these couples actually pay tell completely different stories.

That is the point of this video. If you are planning where to live in retirement and you are only looking at the state income tax rate, you are probably missing four other tax categories that hit your wallet just as hard.

About me

Quick intro. I am Andy, founder of VDB Wealth, where I help families build retirement plans designed around how they actually want to spend the next 30 years, not just around their portfolio. My job is to look at the entire picture, taxes, income, healthcare, legacy, all of it, so the plan you retire into is one you can actually trust.

Why this matters

The state you choose to retire in can swing your total retirement tax bill by hundreds of thousands of dollars over a typical 25 to 30 year retirement. It can also move your plan's probability of success score by a few percentage points. That is real money and real peace of mind.

The problem is that most retirees, and a lot of online articles, focus only on the state income tax rate. That headline number can be very misleading. So today I am walking you through the five layers of state level tax that actually determine whether a state is friendly to your retirement.

Overview of the 5 layers

Here is what we are covering.

One, state income tax, the headline number, and why it is not enough.

Two, how your retirement income is taxed, which can look very different from how your wages were taxed.

Three, property taxes, where many “tax friendly” states quietly take back what they gave up on income.

Four, Social Security and pension taxation, which is shifting fast across the country.

Five, estate and inheritance taxes, the tax bill almost no one talks about until it is too late.

By the end, you will have a clear checklist for evaluating any state you are considering, plus the second layer questions to ask before you sign a lease or sign a deed.

State income tax

Let's start where most people start, the state income tax.

If you look at a map of top marginal state income tax rates, the picture seems simple. California sits at 13.3 percent. New York is just under 11. Oregon is at 9.9. Minnesota is at 9.85. On the friendly side, you have nine states with no broad based income tax: Florida, Texas, Tennessee, Nevada, Wyoming, South Dakota, Alaska, New Hampshire, and Washington.

Looking at this, your gut might say something like, “Move to Florida or Texas, save a fortune in retirement.” And that gut reaction can absolutely be right. But it can also be very wrong, because the top marginal rate is not the rate you will actually pay.

What matters for your retirement is the effective rate on your specific income mix at your specific income level. A couple drawing $90,000 a year, with a chunk of that coming from Social Security and a chunk from a Roth IRA, looks completely different to a state tax department than a working professional pulling in $300,000 in wages.

So the first move when you are evaluating a state is not to look at the top marginal rate. It is to estimate the effective rate on your retirement income, the actual income you plan to draw, in your actual brackets, after the standard deductions and any retiree specific exemptions that state offers. That number is almost always lower than the headline rate, and sometimes dramatically lower.

How retirement income is taxed

This is the layer that surprises retirees the most.

Some states have a real income tax, but they do not tax most forms of retirement income at all.

Illinois has a flat 4.95 percent income tax on wages, but a zero percent rate on retirement income. That includes 401(k) and IRA withdrawals, pension income, and Social Security.

Pennsylvania has a 3.07 percent flat income tax on wages, but a zero percent rate on retirement income for residents who are at least 59 and a half.

Mississippi has a flat income tax in the four to five percent range on wages, and zero on retirement income.

And as of 2023, Iowa exempts retirement income for residents 55 and older. Iowa still taxes wages at a flat 3.8 percent, but not the income most retirees actually live on.

So if you are pulling $80,000 from your IRA in Iowa, your state income tax bill on that withdrawal is the same as it would be in Tennessee. Zero.

Alabama and Hawaii do something similar with pensions. They will tax your wages or your IRA withdrawals, but they will not tax your defined benefit pension income at the state level.

The takeaway is that the income tax rate on the website is the rate on someone working. It is often not the rate on someone retired. The right question to ask is, “What is the state's tax treatment of my specific retirement income mix, IRA withdrawals, Roth withdrawals, Social Security, and pension?”

Property tax

Now let's talk about the layer that quietly cancels a lot of income tax savings.

A state has to pay for things. Roads, schools, public safety. If a state collects very little in income tax, the money has to come from somewhere. Often it comes from property tax.

Hawaii has the lowest effective property tax rate in the country at roughly 0.27 percent of home value. Alabama is around 0.41 percent. Colorado is around 0.51 percent.

On the other end, New Jersey is at 2.23 percent. Illinois is at 2.08 percent. New Hampshire is at 1.93 percent. And Texas, often called a tax haven, comes in at 1.74 percent.

Let me give you a quick example. Same $400,000 home in two different states. In Texas, at a 1.74 percent effective rate, your annual property tax bill is around $6,960. In Hawaii, at 0.27 percent, that bill is around $1,080.

The difference is roughly $5,880 a year. Over 25 years of retirement, that is about $147,000, before we even talk about home value appreciation pulling that gap wider.

Now let's connect it back to income tax. A couple drawing $80,000 in retirement income with a $250,000 home in South Carolina pays a small state income tax bill, but a much smaller property tax bill. In Texas, they save on the income tax side, but pay quite a bit more on the property side. In some scenarios, the Texas couple actually owes more total state tax than the South Carolina couple, even though Texas has zero income tax.

The lesson is simple. Your goal is not to minimize one specific tax. Your goal is to minimize the total tax you pay across every category. And property tax is often the second largest piece of that total.

Social Security and pension taxation

The fourth layer is changing fast, and that is good news for retirees.

Until very recently, around 13 states still taxed at least some Social Security benefits. As of 2026, that list is down to a handful, and most of those still offer significant exemptions and credits that mean the average retiree pays little to nothing.

Minnesota, for example, raised its Social Security exemption thresholds in 2023, so most middle income retirees there now owe nothing on Social Security. Colorado offers a deduction that wipes out Social Security tax for residents 65 and up, up to high income thresholds.

The point is, do not rely on a tax article from 2019. The Social Security taxation map looked very different then. Check the current rules before you make a decision based on this layer.

Pensions follow a similar story. Several states do not tax pension income at all, even when they tax wages. Alabama, Hawaii, Illinois, Mississippi, and Pennsylvania are the most common ones I see. If you have a defined benefit pension, the state's pension treatment is potentially worth tens of thousands of dollars over your retirement.

Estate and inheritance taxes

This is the layer almost no one talks about, and it can be the most expensive.

The federal estate tax exemption is roughly $14 million per person in 2026. Most retirees do not come close to that. So a lot of people assume they have nothing to worry about.

But state estate taxes are completely different. The exemptions are much, much lower.

Oregon's estate tax exemption is $1 million. Massachusetts is $2 million. Washington is roughly $2.2 million. Minnesota is $3 million. Illinois is $4 million. Maine is around $6.8 million. New York is around $6.9 million.

A separate group of states charges inheritance taxes. That is a tax on the person receiving the money, charged based on where they live. Kentucky, Nebraska, New Jersey, Pennsylvania, and Maryland are the main ones. Maryland is the only state that charges both an estate tax and an inheritance tax.

Let me put a number on this. Take a couple with a $4 million estate retiring in Oregon. The state exemption is $1 million, so $3 million is exposed to Oregon estate tax. With a top rate of 16 percent and a graduated structure, the estate could easily owe somewhere around $400,000. That is a roughly 10 percent effective hit on the entire estate, just from the state side.

That same couple in Florida owes zero state estate tax. Zero.

If your goal is to leave money to your kids, your grandkids, or charity, this layer matters as much as anything else we have covered. And it does not show up in a simple income tax map.

Quick bonus: sales tax

One quick bonus layer worth flagging. Sales tax.

Five states have no statewide sales tax: Oregon, Delaware, Montana, New Hampshire, and Alaska. On the high end, Tennessee and Louisiana average around 9.5 percent combined sales tax once you add local rates.

If you spend $50,000 a year on taxable goods and services in retirement, that is the difference between paying $0 in sales tax in Oregon and around $4,775 in Tennessee. Multiply that across 25 years and the gap is real.

How much this matters depends on you. If most of your spending is on essentials like food, utilities, and prescriptions, sales tax is a smaller deal because most states exempt those categories. If you have a big discretionary budget, travel, dining, hobbies, home improvement, sales tax becomes a real number on your retirement income statement.

Context that matters

Before we wrap, I want to give you four pieces of context, because the goal here is not to chase the lowest tax rate, the goal is to plan well.

First, where you live in retirement is not all about taxes. If a state saves you $5,000 a year but you spend $8,000 a year flying back to see your family, you have not saved anything, and you have probably lost something more important than money. Family, climate, healthcare access, and community matter.

Second, look at the second layer details. The headline rate gets attention online. The second layer details, retirement income treatment, property tax, estate exemptions, are where the real money lives.

Third, flexibility wins. Some of the best retirement tax plans I have built involve spending part of retirement in one state and part in another. You might do your heavy Roth conversion years in a state that does not tax retirement income, then move to a state with lower property tax and lower sales tax once your income drops. Geography is a tool you can use more than once.

Fourth, every situation is different. If most of your wealth is in a paid off home, property tax is your biggest variable. If you plan to leave a large estate, estate tax is your biggest variable. If you plan to spend big in retirement, sales tax is your biggest variable. There is no single best state. There is only a best state for you.

Call to action and close

If you have stuck with me this far, here is my ask.

Do not make a decision this big based on a top 10 list or a Google search. Your retirement income mix, your home plans, your estate goals, and your spending style all change the answer. The right state for your neighbor may be the wrong state for you.

If you want to walk through your specific numbers, I would love to help. Head to the link in the description to book a call with our team. We will lay out what each state on your shortlist would actually cost you over the next 25 years, side by side, in real dollars, so you can make this decision once and make it well.

And always remember, you do not need more money. You need a better plan.

Thanks for watching. I will see you next week.