Retirees Beware: The 8 Worst States for Taxes on Your Nest Egg in 2026

Making the decision about where to spend your retirement can have a dramatic impact on how long your savings will last. Most financial planning focuses on accumulation, but that is only half the picture.

Too many retirees overlook how much of a tax bite each state will take from their nest egg, and the oversight can be costly. Some states welcome retirees with no income taxes and modest property taxes. Others do the opposite.

Between income taxes on pensions, retirement account withdrawals, Social Security taxes, estate taxes, and property taxes, retirees on a fixed income can watch their savings erode with surprising speed. That strain can force difficult choices about relocating or downsizing years earlier than planned.

How We Ranked These States

Determining the worst states for retirement taxes requires looking beyond any single metric. A state might have no income tax but crush retirees with property taxes. Another might exempt Social Security but fully tax 401(k) withdrawals and IRA distributions.

For this ranking, we examined how each state treats the most common sources of retirement income: Social Security benefits, pension payments, 401(k) and traditional IRA withdrawals, dividend income, and capital gains. We also factored in property taxes, which hit retirees particularly hard, and estate taxes that reduce how much wealth passes to the next generation.

Each of the eight states listed here approaches taxation differently. Some impose high income rates on nearly all distributions. Others exempt retirement income but compensate with steep property taxes. Understanding the full combination of taxes in each state helps retirees identify which drawbacks matter most for their own financial situation.

8. Vermont

Vermont remains one of only eight states that taxes Social Security benefits in 2026. West Virginia completed its phase-out this year, leaving a smaller but still significant club. Vermont does offer a full exemption for lower earners: single filers with adjusted gross income below $55,000 and joint filers under $65,000 qualify, with a partial exemption phasing out up to $65,000 for single filers and $80,000 for joint filers. Retirees above those thresholds face state income taxes reaching up to 8.75% on their benefits.

All other retirement income receives the full tax treatment, including 401(k) withdrawals, IRA distributions, and pension payments. Dividend income and capital gains face the same rates, and property taxes rank among the highest in the nation. Vermont also imposes an estate tax that triggers at $5 million, with a flat 16% rate on every dollar above that threshold. The exemption is not indexed for inflation. By contrast, the federal exemption now sits at $15 million, a figure made permanent by the One Big Beautiful Bill Act signed on July 4, 2025. That gap leaves wealthier Vermont retirees doing estate planning with a meaningful state liability the federal law no longer imposes.

7. Connecticut

Connecticut does technically tax Social Security, but an income-based exemption offers most retirees a way out. Single filers with AGI below $75,000 and joint filers below $100,000 can exempt 100% of their Social Security benefits. The bigger development for 2026 is that Connecticut has completed its phase-out of taxes on IRA distributions: 75% of that income was exempt in 2025, and beginning in 2026, IRA income is 100% exempt.

The relief has limits. Withdrawals from 401(k) plans and pension income remain taxable at rates up to 6.99% for those above the income thresholds. The state estate tax exemption sits at $13.99 million, roughly in line with where the federal exemption stood before the 2025 increase. Add one of the highest costs of living in the country, and every tax dollar paid carries an outsized sting for Connecticut retirees trying to hold their ground financially.

6. Minnesota

What lands Minnesota on this list is not simply that it taxes most retirement income. The problem is the rate structure itself. The state’s progressive income tax spans from 5.35% to 9.85%, meaning even modest retirement income faces a meaningful state bite before a retiree sees a dollar of it.

State lawmakers have expanded subtraction rules for Social Security benefits in recent years. For 2026, Minnesotans with AGI up to $86,410 as a single filer, or up to $110,780 filing jointly, owe no state tax on their Social Security income. Higher-income households still receive limited protection, however, and residents earning above those thresholds face the full progressive rate structure. The estate tax threshold is particularly punishing: it applies to estates above $3 million, one of the lowest exemptions in the country. For retirees who have built wealth through a combination of home equity and retirement accounts, that threshold can turn an ordinary estate into an unexpected tax event with little warning.

5. New York

New York does not tax Social Security benefits, and the state offers a $20,000 exclusion on pension and retirement income for all residents aged 59½ and older. That is where the state’s generosity ends. Any retirement income above the $20,000 threshold, whether from 401(k) withdrawals, pension payments, or IRA distributions, faces New York’s progressive income tax, which tops out at 10.9%.

Dividend income and capital gains are taxed as ordinary income at the same rates, compounding the burden for retirees who hold investment portfolios. Property taxes pile on further, particularly upstate, where effective rates in some counties exceed 2.3%. New York also imposes an estate tax on estates valued at $7.16 million or more, with a cliff provision that can subject the entire estate to tax if its value exceeds the threshold by even a small margin. Many retirees encounter that cliff only when estate planning conversations happen too late to do much about it.

4. Illinois

Illinois presents a genuine paradox for retirees. The state does not tax the most common forms of retirement income, including IRAs, 401(k) accounts, pensions, and Social Security benefits. Other income such as dividends and capital gains faces a flat state income tax of 4.95%, relatively contained compared to other states on this list.

The real problem is property taxes. Illinois now ranks first nationally for property tax burden, with an effective rate of 1.83% according to the most recent Tax Foundation data. On a $300,000 home, that translates to roughly $5,500 per year in property taxes alone before any local variation is factored in. Sales taxes compound the picture further: the combined state and local rate averages 8.89%, the seventh highest in the country, meaning everyday spending also carries a meaningful tax cost for retirees on fixed incomes.

3. Oregon

Oregon creates a particularly steep tax environment for retirees drawing from traditional IRAs and 401(k) accounts. The combined effective state and federal tax rate on IRA distributions can reach 20.41% for single filers with $100,000 in annual retirement income, the highest such combined rate in the nation.

The state income tax tops out at 9.9% on income above $125,000 for single filers. Oregon does exempt Social Security benefits entirely and has no sales tax, which provides real relief on those two fronts. The estate tax situation is a different matter entirely. Oregon carries the lowest estate tax exemption in the country at just $1 million, a threshold that is not indexed for inflation and that even modest estates can exceed once home equity is factored in. Lawmakers considered an Oregon Senate bill in early 2026 that would have raised the exemption to $2.5 million, but it stalled in the House Revenue Committee before the session ended. The $1 million threshold remains in place, keeping Oregon a serious obstacle for anyone hoping to pass on meaningful generational wealth.

2. California

California’s top income tax rate of 13.3% is the highest in the nation, and that distinction earns the Golden State its spot at number two on this list. An additional 1% mental health services surcharge applies to income above $1 million. While residents can exempt Social Security benefits, all other retirement income taxable at the federal level, including 401(k) withdrawals, traditional IRA distributions, pension payments, dividend income, and capital gains, faces California’s steep progressive tax schedule.

The state offers no special exclusions for retirement income regardless of a taxpayer’s age. Several other large states create meaningful carve-outs once a retiree crosses certain age thresholds; California offers none. Combined with the highest cost of living in the country, particularly for housing, California forces retirees to stretch their savings further just to maintain a consistent standard of living.

1. New Jersey

New Jersey has earned its place at the top of this list through a combination of burdens that is difficult to match anywhere in the country. The statewide average property tax bill reached $10,570 in 2025, a nearly 5% increase over the prior year’s record of $10,095 and the second consecutive year the average has topped $10,000. New Jersey is the only state in the nation with an average residential property tax bill above $10,000. For retirees on a fixed income, that single line item can consume a large portion of an annual budget before any other expense is considered.

Some relief is available through income-based exclusions. Single filers with federal AGI of $150,000 or less can deduct up to $75,000 in pension and retirement account income, and joint filers earning up to $100,000 can deduct $50,000, providing meaningful protection for lower- and middle-income retirees. New Jersey does not tax Social Security benefits. Separately, the One Big Beautiful Bill Act raised the federal SALT deduction cap from $10,000 to $40,000, offering some additional federal relief to higher-income New Jersey filers who itemize.

Income above the exclusion thresholds faces a top state income tax rate of 10.75%, the fourth highest in the country. The combination of nation-leading property taxes, high income taxes on larger retirement incomes, and one of the costliest overall cost-of-living environments in the United States has led multiple independent studies to consistently rank New Jersey last or near last for retirement tax friendliness.

Editor’s note: This update corrects the Vermont Social Security full-exemption threshold for joint filers from $70,000 to $65,000, per the Vermont Department of Taxes, and adds Vermont’s flat 16% estate tax rate. The Illinois section now reflects the Tax Foundation’s 2023 finding that Illinois has surpassed New Jersey to rank first nationally for effective property tax rate at 1.83%. The Minnesota section adds the 2026 Social Security subtraction income thresholds. Context was also added on the SALT deduction cap increase to $40,000 under the One Big Beautiful Bill Act and its relevance to New Jersey filers.

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