A pension is taxable income at the federal level and, in many states, at the state level too. Where you live after you retire can change your take-home pension by several thousand dollars a year.
Federal tax
Your pension is taxed as ordinary income by the IRS. The part that comes from contributions you already paid tax on is tax-free, and your plan’s 1099-R shows that amount. Most public plans now take contributions before tax, so most of the pension is usually taxable. You can ask your plan to withhold federal tax from each payment, which avoids quarterly estimated payments.
States with no income tax
Nine states have no broad tax on wages or pension income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. A retiree in any of them pays no state tax on a pension from any state.
States that exempt public pensions
Several states with an income tax exempt some or all public pension income.
| State | Treatment |
|---|---|
| Illinois | All pension and retirement income exempt |
| Mississippi | All qualified retirement income exempt |
| Pennsylvania | Retirement income exempt after retirement age |
| Alabama | Defined benefit pensions exempt |
| Hawaii | Public and employer-funded pensions exempt |
| New York | New York state, local and federal pensions exempt |
| Louisiana | Louisiana state and teacher system pensions exempt |
| Kansas | KPERS pensions exempt |
| Massachusetts | Pensions from its own contributory public systems exempt |
In several of these states the exemption only covers pensions from that state’s own systems. A New York teacher who retires to New York pays no state tax on the NYSTRS pension, but a CalSTRS retiree who moves there may not get the same break. Other states offer partial exclusions by age or dollar amount.
States that tax pensions fully
California, for example, taxes pensions as ordinary income, including CalSTRS and CalPERS pensions. A Californian keeps that tax with them only while they live in California. Federal law stops a state from taxing a pension of someone who has moved away, so a CalSTRS retiree who moves to Nevada or Texas pays no California tax on it.
Social Security
Most states do not tax Social Security benefits. A handful still tax them in part for higher-income retirees. Now that the Fairness Act has added Social Security on top of many public pensions, check your state’s rule on both.
Before you move
Taxes are only part of the cost of a move. Property taxes, sales taxes, home insurance and health coverage often matter as much. Add up all of them for the places you are considering, and check whether your retiree health plan works out of state. Then compare your after-tax pension, using your pension estimate as the starting figure.