Whether a 401(k) is exempt from state tax depends entirely on where you live when you take the money out. Most states treat traditional 401(k) withdrawals as ordinary income and tax them at your marginal rate, but nine states levy no personal income tax at all, and a small group of others tax wages while fully exempting retirement plan distributions. Over a long retirement, the state you call home can swing your tax bill by tens of thousands of dollars.
Nine States With No Personal Income Tax
The cleanest way to owe zero state tax on a 401(k) is to live somewhere that does not tax income in the first place. As of 2026, nine states fit that description:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
New Hampshire joined the fully tax-free group recently. It used to tax interest and dividend income, but that levy was repealed effective January 1, 2025.1New Hampshire Department of Revenue Administration. Repeal of NH Interest and Dividends Tax Now in Effect Residents of any of these nine states pay no state tax on 401(k) withdrawals, no matter the size.
States That Tax Income but Exempt 401(k) Distributions
A handful of states levy an income tax on wages and investment earnings but carve retirement plan distributions out entirely.
Illinois is the clearest example. It taxes most income at a flat rate, but 401(k) distributions, IRA withdrawals, pensions, and Social Security benefits are all excluded from taxable income.2Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income Mississippi similarly exempts all common forms of retirement income, including 401(k) and IRA distributions. Iowa exempts retirement income once a resident reaches age 55.3AARP. 13 States That Don’t Tax IRA and 401(k) Distributions
Pennsylvania reaches the same result by a different route. It treats 401(k) contributions as taxable compensation in the year you earn them, so you pay Pennsylvania income tax on the money before it enters the account.4Pennsylvania Department of Revenue. Gross Compensation Because the state already taxed the contributions, it does not tax the distributions when you withdraw them in retirement. Track your cost basis carefully so you do not end up paying twice.
Other states offer partial exemptions tied to age or income thresholds. These vary widely. Some shelter only the first $10,000 of retirement income; others shield $65,000 or more. Many require you to be at least 55 or 62. Anything above the threshold is taxed at the state’s normal rates, so the exemption often functions more like a deduction than a full exclusion for retirees with larger withdrawals.
Watch the Pension vs. 401(k) Distinction
This is where people get tripped up. Plenty of states marketed as “retirement-friendly” exempt government pensions while still taxing 401(k) withdrawals. Alabama fully exempts pension income but only partially exempts 401(k) and IRA distributions. Kansas exempts public employee pensions and fully taxes 401(k) withdrawals. Louisiana and Hawaii follow the same pattern, shielding government pensions while taxing private retirement plan income.
The distinction usually traces back to state constitutional provisions or older tax code structures written before 401(k) plans existed. If you are comparing states for retirement, look up the specific treatment of 401(k) distributions rather than trusting broad claims that retirement income is tax-free.
How States That Tax 401(k) Withdrawals Handle Them
In a state with a personal income tax and no retirement carve-out, the full withdrawal is treated as ordinary income and taxed at your marginal rate. State rates run from roughly 1% at the lowest brackets to over 13% in California when its high-income surcharge applies.5Tax Foundation. State Individual Income Tax Rates and Brackets, 2025 A $60,000 annual withdrawal in a state with a 5% effective rate costs $3,000 a year in state tax alone.
Your plan administrator reports each distribution to your state on Form 1099-R,6Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025) and state revenue departments share data with the IRS to catch unreported retirement income.7Internal Revenue Service. State Information Sharing Skipping a distribution on your state return can trigger penalties and interest running from the original filing deadline.
Withholding is worth checking too. Some states, including Iowa, Massachusetts, Nebraska, Virginia, and Vermont, require state withholding whenever federal withholding applies. States like California, Delaware, Georgia, North Carolina, Oklahoma, and Oregon default to state withholding when federal tax is withheld but allow you to opt out. Arkansas, Connecticut, and Michigan apply state withholding independently of your federal election. If you live in a no-tax state or one that exempts retirement distributions, confirm with your plan administrator that nothing is being withheld. Over-withholding is refundable at filing time, but it locks up your money in the meantime.
Moving in Retirement Cuts Off Your Old State
Federal law offers a strong protection for retirees who relocate. Under 4 U.S.C. § 114, no state may impose an income tax on the retirement income of someone who is not a resident of that state. The statute covers distributions from qualified trusts under Section 401(a), SEP plans, 403(b) annuities, IRAs, 457 deferred compensation plans, and governmental plans.8Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
The state where you earned the money cannot follow you across the border. If you spent 30 years working in a high-tax state and then moved to Florida before taking a dime out of the plan, the old state has no claim on those withdrawals. Only your state of residence at the time of the distribution can tax it.
Mid-year moves are messier. Relocate from a taxing state to a non-taxing state in June, and both states may want a part-year return. Distributions received while you still lived in the first state are taxable there; distributions received after you established residency in the new state follow its rules. Keep clean records of your move date, plus documentation of your new domicile such as voter registration, a driver’s license, and property records.
Roth 401(k) Withdrawals Are Different
Roth 401(k) accounts flip the tax picture. Contributions go in after tax, and qualified distributions come out entirely free of federal and state tax. Most states follow the federal treatment set out in 26 U.S.C. § 402A.9Office of the Law Revision Counsel. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions
To qualify, a Roth 401(k) distribution has to clear two hurdles. You must be at least 59½ (or meet another qualifying event such as disability or death), and the account must have been open for at least five tax years from the first year you made a designated Roth contribution to that plan. Both conditions have to be met.9Office of the Law Revision Counsel. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions
Withdraw before qualifying, and the earnings portion is taxable as ordinary income at the federal and state level. The federal 10% early withdrawal penalty under IRC Section 72(t) applies to the taxable portion as well.10Internal Revenue Service. Substantially Equal Periodic Payments Some states impose their own early withdrawal penalties, with the specifics varying by state.
Inherited 401(k) Accounts
When a 401(k) passes to a beneficiary, state tax can arrive from two directions.
Income tax comes first. Distributions the beneficiary takes are generally subject to state income tax in the beneficiary’s state of residence, using the same rules that would have applied to the original owner. The 4 U.S.C. § 114 residency protection applies here too: only the beneficiary’s home state can tax the income.8Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
Inheritance and estate taxes can hit the balance separately. Five states levy an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.11Tax Foundation. Estate and Inheritance Taxes by State Rates and exemptions turn on the beneficiary’s relationship to the deceased. Spouses are typically exempt in full; distant relatives or unrelated beneficiaries can face rates as high as 15% to 16%. Several states also run their own estate tax with thresholds well below the federal exemption. Massachusetts, for instance, starts taxing estates at $2 million. A sizable 401(k) balance can push an estate over one of these state thresholds even when it stays comfortably under the federal one.