States That Do Not Tax Retirement Income 

Which States Don’t Tax Pensions? 

Seven states do not tax pension payments made to retirees: 

• Alabama
• Alaska
• Florida
• Hawaii
• Illinois
• Iowa
• Mississippi
• Nevada
• New Hampshire
• Pennsylvania
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Similarly, Illinois, Pennsylvania, and Mississippi don’t tax IRA or 401k plans. 

Other Ways to Avoid High Taxes in Retirement 

Aside from moving, there are plenty of other convenient ways to avoid paying excessive taxes in requirements that don’t require you to uproot your life. 

Contribute to a Retirement Account

Making regular contributions to accounts like 401(k)s, traditional IRAs, and Roth IRAs can help you save on taxes. Contributions to these accounts are typically tax deductible, meaning the money removed from your paycheck is subtracted from your taxable income. 

Keeping your money in these types of retirement accounts means you pay taxes upfront instead of when you make a withdrawal in retirement. If you’re living in a state where you’re in a high tax bracket, keeping money in retirement accounts like Roth IRAs can be beneficial in the long run. These tax-deferred accounts can help your money grow faster over long periods of time.

Convert to a Roth Account 

If you already have a traditional IRA or 401k, there are still ways you can save on taxes in retirement. In some cases, you can avoid taxes altogether on these funds by converting them to a Roth IRA account. Here’s how a Roth conversion works:

1. Pay taxes on the converted amount. When you convert your traditional IRA or 401(k), you will owe income taxes on the amount converted because traditional retirement accounts are funded with pre-tax dollars. Meanwhile, Roth accounts are funded with after-tax dollars.  

Enjoy tax-free withdrawals in retirement. After the conversion is complete, your funds will grow tax-free within the Roth account. This means you won’t owe taxes on withdrawals in retirement, including any investment gains you might acquire. 

Reverse Mortgage 

Another way to avoid paying high taxes in retirement is to participate in a reverse mortgage. There are a few options when it comes to reverse mortgages, but one of the most common is the Home Equity Conversion Mortgage (HECM). This reverse mortgage option is insured by the Federal Housing Administration (FHA).

The HECM reverse mortgage is a loan just like a traditional mortgage. However, instead of making monthly payments to a lender, seniors receive payments from their lender. This is available in the form of a lump sum, line of credit, monthly payments, or a combination of the three. These funds can be used to help homeowners in a variety of situations, including retirement.

Usually, reverse mortgages benefit retirees who are looking for enough funds to retire in a particular place. They can also provide seniors with financial freedom. Funds can be allocated to pay off credit card debts or make home renovations so they can stay in one place for longer without having to tap into their liquid funds. 

How much retirees receive in their reverse mortgage is based on factors like the age of the borrower, the value of the property being mortgaged, and current interest rates. The amount a borrower receives typically ranges between 40-60% of the home’s total value. It’s important to note that the FHA puts a lending limit on how much lenders can loan to reverse mortgage borrowers. In 2023, that limit is $1,089,300. This amount can increase over time if the loan has a variable interest rate, which also provides more options when it comes to the ways you receive the money from your reverse mortgage. 

Fixed-rate borrowers are limited to only receiving their reverse mortgage payments in a single lump sum payment. But if you opt for a reverse mortgage with a variable interest rate, payments can look like:

• Monthly payments to residents of the home
• Monthly payments for a fixed number of months 
• A line of credit  
• A line of credit and monthly payments 
• A lump sum disbursement and monthly payments 
• A lump sum disbursement along with a line of credit 

Unlike other kinds of mortgages, the payments made on reverse mortgages are not taxable. Plus, when reverse mortgages are used early enough in retirement, they can provide income to seniors looking to convert their savings into a Roth account at a lower tax rate. 

If you’re interested in applying for a reverse mortgage, here are the necessary steps: 

1. Meet with an advisor who will review your finances and let you know if a reverse mortgage is right for you.
2. Meet with a HUD-approved counselor who will review the pros and cons of a reverse mortgage. 
3. Submit your application, which will be processed by underwriting. 
4. Obtain an appraisal to determine the current market value of your home.
5. Schedule a closing date and sign the documents required. 
6. Receive your reverse mortgage funds in the manner you agreed to in your application. 

When it comes to finding the reverse mortgage lender that’s right for you, research is of paramount importance. Doing so will give you the knowledge you need to understand all of the options a lender has to offer.