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. Yes, there are states that welcome retirees with no income taxes and modest property taxes, but the opposite is equally true.
Between income taxes on pensions, retirement account withdrawals, Social Security taxes, estate taxes, and property taxes, retirees on a fixed income can watch their nest eggs shrink surprisingly fast and face difficult choices about relocating or downsizing.
How We Ranked These States
Determining the worst states for retirement taxes goes beyond looking at a single metric. A state might have no income tax but can crush retirees with property taxes. Another state 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 can hit retirees particularly hard, and estate taxes that reduce how much money 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’s welcoming geography is offset by disappointing retirement burdens.
Vermont remains one of only nine states that taxes Social Security benefits in 2026, even as recent legislation raised the income thresholds for exemption. Single filers with adjusted gross income below $55,000 and joint filers under $70,000 now qualify for a full exemption, but retirees above those thresholds face state income taxes reaching up to 8.75% on their benefits.
All other income outside of Social Security receives the full tax treatment, including 401(k) withdrawals, IRA distributions, and pension payments. Dividend income and capital gains face the same burden, while property taxes rank among the highest in the nation. The state also imposes an estate tax that kicks in at $5 million, well below the federal exemption of $15 million for 2026, a figure made permanent by the One Big Beautiful Bill Act signed in July 2025. Wealthier Vermont retirees planning their estates will feel that gap acutely.
7. Connecticut
Connecticut does technically tax Social Security, but an income-based exemption offers 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, though. 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 to all of that one of the highest costs of living in the country, and every tax dollar paid carries an outsized sting.
6. Minnesota
What lands Minnesota on this list is not simply that it taxes most retirement income. The problem is that even its lowest income tax bracket is high by national standards. The progressive rate structure ranges from 5.35% to 9.85%, which means even modest retirement income faces a meaningful state bite.
State lawmakers have expanded the subtraction rules for Social Security benefits in recent years, but higher-income households still receive limited protection. The estate tax threshold is particularly punishing: it applies to all estates valued 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 low threshold can turn an ordinary estate into an unexpected tax event.
5. New York
Moving outside of New York City might be quieter, but no less expensive.
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. Unfortunately, that is where New York’s generosity ends. Any retirement income above the $20,000 threshold, whether from 401(k) withdrawals, pension payments, or IRA distributions, faces the state’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, something that catches too many retirees off guard.
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%, which is relatively contained.
The real problem is property taxes. Illinois consistently ranks first or second nationally for property tax burden, with effective rates running between 1.83% and 2.07% of a home’s assessed value. A retiree owning a $300,000 home could owe roughly $6,000 per year in property taxes alone. Sales taxes compound the picture, with the combined state and local rate averaging 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 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 some relief. However, Oregon carries the lowest estate tax exemption in the country at just $1 million, a threshold that even modest estates can exceed once home equity is factored in, making it a substantial obstacle for anyone hoping to pass on meaningful generational wealth.
2. California
No matter where you retire in California, it can get expensive, fast.
California’s top income tax rate of 13.3% is the highest in the nation, a distinction that earns the Golden State its number two spot on this list. There is also an additional 1% mental health services surcharge applied to income above $1 million. While residents can exempt Social Security benefits, all other retirement income that is 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, a stark contrast to several other large states. 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. The statewide average property tax rate stands at 2.23%, and the average annual property tax bill crossed $10,000 for the first time in 2025, reaching $10,095 statewide. For retirees on a fixed income, that single line item can consume a large portion of an annual budget.
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. Importantly, New Jersey does not tax Social Security benefits.
Income above the exclusion thresholds, however, 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 New York’s top state income tax rate from 10.09% to 10.9%, fixes the New York retirement income exclusion age threshold (59½), corrects the Oregon income tax threshold notation, updates the New Jersey average annual property tax bill to the 2025 figure of $10,095, and adds context about the One Big Beautiful Bill Act permanently setting the federal estate tax exemption at $15 million for 2026.
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