States vary widely in the way they tax retirement income so location is an important consideration in financially planning for retirement. Some states don’t levy income states on any sort of retirement income, while others tax IRA and 401(k) distributions, pension payouts and even social security payments like ordinary income. Income taxes are just part of the story, however, as some states with low or no income taxes have high property, sales and other taxes. Consider working with a financial advisor when you are planning for retirement to make sure you avoid any unnecessary taxes.
Retirement Income Tax Basics
Most retirement income can be subject to federal income taxes. That includes Social Security benefits, pension payments and distributions from IRA and 401(k) plans. Exceptions include distributions from Roth IRA and Roth 401(k) plans. Federal income taxes on Roth contributions are paid before the contributions are made. These contributions as well as any investment gains can be withdrawn free of federal income taxes after five years if you have reached age 59 1/2.