One of the main benefits of contributing to a 401k plan for your retirement is that they offer excellent tax advantages. There are many states you can live in that do not tax your pension, IRA, 401k and Social Security income. However, some states will tax all of this.
If you’re thinking of taking the benefits of your 401k plan, you should consider the income tax rules in the state where you live.
For example, Your pension income is not taxable in New York state if it is paid by New York State or local government, the federal government, including Social Security benefits or certain public authorities. If you are over the age of 59 ½ or turn 59 ½ during the tax year, you may also qualify for a private pension and annuity exclusion of up to $20,000. This exclusion from New York taxable income applies to pension and annuity income included in your federal adjusted gross income.
So,which states are the most beneficial to people looking to take their 401k benefits? The map below shows those states that tax no pension income, those that tax all your pension income and those that tax a partial amount.
As of 2009, there are only three states that do not tax pension income. These are Illinois, Mississippi and Pennsylvania. These three states exempt virtually any kind of income received from tax-deferred accounts, including pensions, 401ks, IRAs and qualified plans.
New York has stipulations for some government employees to receive tax-free pension income, but not all retirees.
If your pension is from the government or the military, then seven more states open up for consideration: Alabama, Hawaii, Kansas, Louisiana, Massachusetts, Michigan and New York.
States that tax all retirement income at relatively high rates include California, Connecticut, Nebraska, Rhode Island and Vermont.
The rules in the remainder of states are different. Most states collect taxes on some of your income – for example in some states you might just pay taxes on the first $20,000 of your pension and nothing on the rest. It is always worth checking out the rules on a state website or by contacting the local taxation department.