Retiring in the wrong state doesn’t just cost you money every April. It costs you the money you spent decades building, one paycheck at a time, until the day you actually need it. The state you choose to retire in shapes how much of that pile survives, not just while you’re alive and spending it, but what’s left when you’re not. The gap between the best and worst retirement savings states can run to six figures, and most people don’t find that out until it’s too late to move.
Most of the conversation around retirement focuses on how much you save. Less of it focuses on how much you’re allowed to keep. That’s a different question, and it turns on things like whether your state taxes your Social Security benefits, your IRA withdrawals, your pension, your spouse’s pension, and the money you want to leave behind. States that tax two or three of those income streams can drain a retirement portfolio faster than any bad investment decision a retiree is likely to make in their seventies.
Where the Savings Go
About 3 in 5 American workers say their retirement savings are behind where they should be. Of those, 37 percent say they’re significantly behind, while 21 percent say they’re slightly behind. For the people who are already behind, landing in a high-tax state at retirement isn’t a minor inconvenience. It’s the thing that tips a fragile plan into a broken one.
Those figures come from Bankrate’s 2025 survey, which found that the savings shortfall spans a wide range of households, not just lower earners. The 401(k) contribution rules changed in 2026, with new limits and Roth catch-up requirements that affect many workers in their fifties and sixties, and where those workers ultimately retire will determine how much of what they’re now contributing they’ll actually get to keep.
Here are the five states where retirement savings disappear fastest, and what’s actually driving that erosion.
1. Indiana
Indiana sits at the top of this list for a reason that seems counterintuitive at first: its flat income tax rate looks modest on paper. Indiana has a low flat tax rate for taxable income, but the state only exempts Social Security from retirement income taxation. That means IRA withdrawals, 401(k) distributions, and pension income are all on the table. A retiree drawing from multiple accounts, which is most retirees, pays state income tax on nearly all of it.
What makes Indiana’s situation worse than the rate alone suggests is the stacking effect. Indiana also allows counties to levy their own income taxes on top of the state rate, and most do. According to Kiplinger’s analysis, Indiana appears among the ten least tax-friendly states for retirement, alongside states that are more commonly flagged. The combination of a broad income tax base, county surcharges, and limited exemptions for retirement income creates a drain that runs from the first year of retirement to the last.
The result, when played out across a twelve-year retirement, is significant. A retiree in Indiana will have considerably less to pass on to their family than someone in a state like Alaska, which charges no income tax at all. Choosing the right state to retire in can save $5,000 to $30,000 or more per year in taxes, according to analysis from Country Tax Calc. Multiply that annual gap across a retirement that lasts a decade or more, and Indiana’s mild-seeming tax rate becomes something much harder to overlook.
2. West Virginia
West Virginia has been in the middle of a transition on retirement taxes, and that transition matters for when you retire there. As of 2026, all West Virginia residents are 100 percent exempt from state income tax on Social Security benefits. That’s real progress, and it means one significant income stream is now protected. The problem is that the relief stops there. Other retirement income, private pensions, 401(k) or IRA distributions, continues to be treated under normal state income tax rules after applicable deductions.
West Virginia’s income tax brackets top out at 4.58 percent, and most retirement account withdrawals land squarely in those brackets. For retirees who built their savings in a 401(k) or traditional IRA, the bulk of their income in retirement comes from exactly the streams that remain taxable. The Social Security exemption is welcome, but it doesn’t change the math for someone drawing $40,000 or $50,000 a year from a retirement account.
The state also carries higher cost-of-living pressure in specific categories, particularly healthcare, and healthcare is exactly where retirement spending tends to spike. A retiree on a fixed income in West Virginia faces a combination of ongoing income tax on their largest savings vehicles and regional healthcare costs that eat further into what’s left. The Social Security fix was meaningful. It was also incomplete.
3. Arkansas
Arkansas regularly appears on affordability rankings as a low-cost state, and in some ways that reputation holds. Groceries are cheap. Housing is accessible. The problem is that a low cost of living and a retirement-friendly tax code are not the same thing, and Arkansas treats them as if they are interchangeable when they aren’t.
Arkansas taxes most types of retirement income, though taxpayers aged 59.5 or older can deduct up to $6,000 of eligible retirement income from their taxable income. A $6,000 deduction against a retirement income of $50,000 or $60,000 is not nothing, but it’s also not the kind of exemption that dramatically changes a retiree’s tax burden. The remainder gets taxed. Arkansas income tax runs from a low of 2 percent on lower income to a high of 3.9 percent on income above $26,400. Those rates look manageable in isolation, but they apply to the full range of a retiree’s income above that small deduction, year after year.
Arkansas has one of the highest average combined state and local sales tax rates in the country, at 9.46 percent, according to data from the Tax Foundation. That rate applies to everyday purchases throughout the year. Layer that on top of broad income taxation on retirement accounts, and Arkansas’s affordability story gets a lot more complicated.
4. Iowa
Iowa’s situation is the most interesting on this list because it has genuinely improved in recent years, and it still makes the list. Iowa recently made retirement income tax-exempt for residents 55 and older and eliminated its inheritance tax for tax years 2025 and later. That is a significant policy change. For a retiree who is 55 or older and drawing from qualified retirement accounts, Iowa now offers real relief. The inheritance tax repeal is also meaningful for anyone thinking about what they’ll leave behind.
The reason Iowa still appears here is timing and completeness. Iowa has a flat income tax rate of 3.8 percent, and while the retirement income exemption for those 55 and over is now in place, the state’s other tax pressures don’t disappear. Property taxes in Iowa run higher than the national average, and that cost lands directly on retirees who own their homes. It doesn’t disappear from monthly expenses just because it doesn’t appear in income tax calculations. Iowa phased out its inheritance tax effective in 2025, so there is now no inheritance tax in Iowa, but that change came after years of it being a real cost for estates.
If you’re retiring to Iowa at 55 or older and your income comes primarily from qualified retirement accounts, the picture looks better now than it did three years ago. If you’re under 55, still working, or drawing from non-qualified sources, you’re in a different situation. Iowa gets credit for moving in the right direction. It just hasn’t finished the trip, and that property tax burden is a persistent drag on monthly expenses that income tax calculations alone will never capture.
5. Kansas
Kansas makes this list because of what it taxes and how it taxes it. The good news first: Kansas has fully eliminated state income tax on Social Security benefits for all residents as of tax year 2024. That’s a meaningful exemption. The rest of the picture is harder. Kansas only exempts retirement income for some retirees depending on adjusted gross income, with income tax rates ranging from 5.2 percent on lower income up to 5.58 percent on income above $46,000.
Those rates matter because they apply to IRA withdrawals, 401(k) distributions, and private pension income once a retiree crosses the AGI threshold for exemptions. A retiree with $55,000 in annual income from retirement accounts, which is not a lavish retirement, is paying Kansas income tax on a large portion of it. As Fidelity’s analysis of state taxes on retirement income makes clear, among states that do tax IRA income, the effective combined rate can vary dramatically depending on exemptions and deductions available, and Kansas offers limited relief for most retirees. Kansas ranks among the ten least tax-friendly states for retirement, and that ranking reflects the gap between the Social Security exemption, which protects one income stream, and the income tax treatment of everything else a retiree draws on.
For workers in their fifties and sixties now contributing more under the updated 2026 limits, the state they ultimately retire in will determine how much of what they’re now putting away they’ll actually get to keep. In Kansas, retirees with meaningful savings in traditional retirement accounts will pay state income tax on most of what they withdraw, year after year, at rates that are not low by any measure.
Read More: Retirees Are Leaving Florida: 5 States Poised to Be the Top Retirement Spots in 10 Years
What This Means for You
The choice of where to retire is one of the few genuinely large financial levers that people can pull late in their working lives, and it tends to get far less attention than portfolio allocation, contribution rates, or Social Security timing. Those things matter. But a state that taxes your IRA, your 401(k), your pension, and your sales purchases at a combined rate that’s several thousand dollars a year more than its neighbor will quietly undo years of careful saving. Where you live in retirement can easily mean a $3,000 to $10,000 or more annual difference in after-tax income.
None of the states on this list are necessarily wrong choices for every retiree. Someone with a military pension, a fully paid-off home in a county with low property taxes, and Social Security as their primary income might find Indiana or West Virginia perfectly manageable. Someone drawing heavily from a traditional IRA for twenty years will feel those taxes more acutely than any ranked list can capture. The point isn’t that these states are bad places to live. The point is that the retirement savings states where you land will do real arithmetic on your money, and that arithmetic deserves to be part of the decision, ideally before you sign the lease, not after you’ve filed your first state return and done the math.
Disclaimer: This information is not intended to be a substitute for professional medical advice, diagnosis, or treatment and is for information only. Always seek the advice of your physician or another qualified health provider with any questions about your medical condition and/or current medication. Do not disregard professional medical advice or delay seeking advice or treatment because of something you have read here.
AI Disclaimer: This article was created with the assistance of AI tools and reviewed by a human editor.