If you want to keep every dollar of your 401(k) withdrawal out of state hands, twelve states can do that for you. Nine of them levy no personal income tax at all, and three more — Illinois, Mississippi, and Pennsylvania — tax other income but fully exempt qualified 401(k) distributions. Several additional states don’t go that far but let retirees exclude a set amount of retirement income each year. These are the states that don’t tax 401(k) distributions, and the rules that decide whether your withdrawal actually qualifies.
The Nine States With No Income Tax
The simplest route to a tax-free 401(k) withdrawal at the state level is living somewhere that taxes no income to begin with. Nine states fit that description:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Because none of these states has an individual income tax code, every form of retirement income is automatically exempt at the state level. That covers 401(k) withdrawals, IRA distributions, and pension payments alike. The size of the withdrawal doesn’t matter, your age doesn’t matter, and it doesn’t matter whether the distribution is on schedule or early. Your only income tax bill on that money is federal.
Two of these states have gone further and written the prohibition into their constitutions. Texas amended its constitution in 2019 to explicitly bar any personal income tax.1State of Texas. Texas Constitution Florida’s constitution requires a supermajority public vote before an income tax could be enacted.
Three Income-Tax States That Fully Exempt 401(k) Withdrawals
A short list of states with broad income taxes still leave qualified 401(k) money entirely alone. You’ll pay state tax on wages or investment gains, but not on your retirement plan distributions.
Illinois. Residents subtract federally taxed retirement income, including 401(k) and IRA distributions, from their state adjusted gross income. That subtraction takes qualified retirement plan withdrawals out of reach of the state’s flat income tax.
Mississippi. Distributions from qualified retirement plans, 401(k)s included, are exempt from state income tax when the recipient has met the retirement age and service requirements under the employer’s plan.2Justia. Mississippi Code Title 27, Chapter 7, Section 27-7-15
Pennsylvania. Distributions from employer-sponsored retirement plans, including 401(k)s, are not subject to the state’s flat income tax, provided you receive them after reaching the plan’s normal retirement age and after separating from service with that employer.3Pennsylvania Department of Revenue. PA Personal Income Tax Guide – Gross Compensation
The catch in Mississippi and Pennsylvania is that the exemption depends on meeting the plan’s own retirement criteria, not just hitting a particular birthday. Take an early distribution before satisfying those requirements and the withdrawal becomes taxable. In Pennsylvania, that means the state’s 3.07 percent flat tax applies to the full amount.3Pennsylvania Department of Revenue. PA Personal Income Tax Guide – Gross Compensation
States That Exclude Part of Your 401(k) Income
Several states take a middle path. They tax retirement income in general but let you exclude a set dollar amount each year. If your annual 401(k) withdrawals fit under the cap, you owe the state nothing. Anything above it is taxed at the state’s normal rates.
Georgia
Georgia’s retirement income exclusion is tied to age. Residents between 62 and 64 can exclude up to $35,000 per person. At 65 the cap rises to $65,000 per person.4Justia. Georgia Code Title 48, Chapter 7, Section 48-7-27 – Computation of Taxable Net Income A married couple filing jointly where both spouses are 65 or older can shelter up to $130,000 of retirement income from state tax.
Colorado
Colorado’s pension and annuity subtraction covers 401(k) distributions. Retirees under 65 can exclude up to $20,000 of qualifying retirement income. At 65 and older, the exclusion rises to $24,000.5Department of Revenue – Taxation. Individual Income Tax – Information for Retirees Colorado imposes no minimum age to start claiming the subtraction; younger retirees still qualify for the $20,000 tier.
Michigan
Michigan ties its exclusion to the taxpayer’s birth year, using a tiered system. Retirees born before certain cutoff dates receive larger deductions on retirement income; those born after receive smaller or phased-out deductions. The amounts have changed multiple times in recent years, so check the Michigan Department of Treasury for the figures that apply to your birth year before filing.
How the Cap Works
Withdraw $80,000 from your 401(k) in a state with a $35,000 exclusion and the remaining $45,000 gets added to your state taxable income at the state’s marginal rates. Multiple withdrawals from different accounts all count toward the same annual cap. Joint filers should confirm whether the exclusion runs per person or per return, since that varies from state to state.
Roth 401(k) Withdrawals Follow Different Rules
A qualified Roth 401(k) distribution — one taken after age 59½ from an account open at least five years — is excluded from federal taxable income entirely, earnings included.6Internal Revenue Service. 401k Resource Guide – Plan Participants – General Distribution Rules Because most state income taxes start from your federal adjusted gross income or federal taxable income, a qualified Roth distribution typically doesn’t appear on your state return either, even in states that fully tax traditional 401(k) withdrawals.
Non-qualified Roth distributions are treated differently. If you withdraw earnings before meeting the age or holding-period requirements, those earnings enter federal taxable income and carry through to your state return.
State Early Withdrawal Penalties
The federal government charges a 10 percent penalty on most 401(k) distributions taken before age 59½, on top of regular income tax.7Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Most states don’t add their own penalty, but a few do. California adds a 2.5 percent state penalty on early distributions. Arkansas, Nebraska, Pennsylvania, and Wisconsin also impose their own early withdrawal surcharge, typically calculated as a percentage of the federal penalty.
State early withdrawal penalties apply regardless of any partial exclusion the state might otherwise offer on retirement income. A state that doesn’t tax your qualified 401(k) money can still tack on a penalty if you pull the money out too soon.
Making the Move Stick: Residency Rules
Relocating to a no-income-tax state only helps if that state actually recognizes you as a resident, and if your former state accepts that you’ve left. State revenue departments look at two things: where you are physically, and where you intend to make your permanent home.
Most states use a physical-presence test that requires spending more than half the year, typically 183 or 184 days, within the state. Meeting the day count alone may not be enough. Agencies also want to see concrete steps: an updated driver’s license, voter registration, primary bank accounts moved over, a mailing address in the new state. Some states let you file a formal declaration of domicile, a notarized statement recorded with a local government office, to establish your legal home.
Residency Audits
High-tax states have a financial reason to keep former residents on their tax rolls, and they run residency audits aimed at people who move to no-income-tax states around retirement. New York, California, and New Jersey are known for particularly aggressive audit programs.
In a residency audit, the burden generally falls on you to show that you genuinely changed your home. Agencies may review cell phone records, credit card statements, social media activity, and veterinary records to reconstruct where you actually spent your time. A detailed calendar or travel log kept during the transition year gives you something to point to if you’re questioned.
The exposure is real. If your former state successfully argues you never truly left, you could owe back taxes, interest, and penalties on the 401(k) income you thought was exempt. Cleanly severing ties — canceling resident memberships, moving medical records, surrendering the old driver’s license — makes a challenge harder to sustain.