The 8 Worst States for Taxes on Your Nest Egg

Making the decision about where to spend your retirement can, unsurprisingly, have a pretty dramatic impact on how long your savings will last. While most financial planning focuses solely on the accumulation aspect, it isn’t the only consideration.

What many people, in fact, too many people ignore is that you have to consider just how much of a tax bite each state is going to take from your nest egg, and this deserves special attention. Yes, there are states that welcome retirees with no income taxes and modest property taxes, but the opposite is also true.

Between income taxes on pensions, retirement account withdrawals, Social Security taxes, estate taxes, and the aforementioned property taxes, retirees, especially those on a fixed income, can see their nest eggs evaporate and be forced to make 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 looked at how each state treats the most common sources of retirement income, including 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 can reduce how much money is being passed on to the next generation.

What’s notable is how each of the eight states listed here approaches taxation, as some have high income rates that apply to nearly all kinds of distributions. Other states exempt retirement income, but again, make up for it with high property taxes. Understanding each state’s combination of taxes helps retirees identify which drawbacks will matter for their personal financial situation.

8. Vermont

Still one of a small handful of states that taxes Social Security benefits in 2026, even as recent legislation has raised the income thresholds for exemption. Single filers with AGI (adjusted gross income) below $55,000 and joint filers under $70,000 now qualify for a full exemption, but retirees over these thresholds will face state income taxes reaching up to 8.75% on benefits.

All other income outside of Social Security receives the full tax rate, including 401(k) withdrawals, IRA distributions, and pension payments. Dividend income and capital gains face the same issue, all while property taxes are among the highest in the nation. Add to this an estate tax that kicks in at $5 million, well below the federal exemption rate of $15 million as of 2026, which will be a source of major aggravation to wealthier retired residents.

7. Connecticut

Connecticut does technically tax Social Security, but there is a loophole to escape this burden through income exemptions. If your AGI is less than $75,000 as a single filer or $100,000 filing jointly, you can exempt 100% of your Social Security benefits. The bigger news for 2026 is that Connecticut is completing its phase-out of taxes on IRA distributions, which means that in 2025, 75% of the income was exempt, and in 2026 onward, 100% of IRA income is exempt.

However, 401(k) withdrawals and pension income remain taxable at rates up to 6.99% for those above income thresholds. The estate tax exemption applies to all estates above $13.99 million, all while navigating one of the highest costs of living in the country, which further amplifies every tax dollar paid.

6. Minnesota

What makes Minnesota one of the worst states to retire with a nest egg isn’t that it taxes most retirement income; it’s that the lowest income tax bracket is quite high compared to other states. The progressive tax rate ranges from 5.35% to 9.85%, meaning even modest retirement income can be taxed heavily.

On the plus side, state lawmakers have expanded subtraction rules for taxes on Social Security benefits, but higher-income households don’t receive as much protection. Estate taxes are particularly bad as they land on every estate valued at over $3 million, one of the lowest thresholds in the country. For retirees who have accumulated wealth through a combination of home equity and retirement accounts, this is a pretty awful drawback.

5. New York

New York doesn’t tax Social Security benefits, and the state offers a $20,000 exclusion for pension and retirement income for all residents aged 5.95% and older. Unfortunately, this is where New York’s good news comes to an end, as any retirement income above the $20,000 threshold, whether it’s from 401(k) withdrawals, pension payments, etc., faces the state’s progressive income tax rate, which tops out at 10.09%.

Dividend income and capital gains are taxed as ordinary income at the same rates, all while property taxes are compounding the retirement burden, particularly upstate, which is quieter, but also has an effective rate in some counties that exceeds 2.3%.

New York also imposes an income tax on accounts with $7.16 million or more, with a cliff provision that can subject the entire estate to tax if it exceeds this threshold even by a small percentage, something that catches too many retirees off guard.

4. Illinois

Illinois is something of a paradox for retirees, as the state doesn’t tax the most common forms of retirement income. This includes things like IRAs, 401(k) accounts, pensions, and other Social Security benefits. Retirees may also incur a state income tax of 4.95% on other income, including dividends and capital gains.

So why does Illinois rank among the worst? It’s all about property taxes, as they are among the highest in the country. In 2025, Illinois ranked 1st or 2nd in the US at different times during the year, with rates ranging from 1.83% to 2.07% of the home’s total value. This meant payments of $6,000 could be owed on a home worth $300,000, all while sales taxes add another layer as the combined state and local rate averages 8.89%, the seventh-highest in the country.

3. Oregon

Oregon is something of a conundrum for retirees who are withdrawing from traditional IRAs and 401(k) accounts. The effective state and federal tax ranges from a high of 20.41% on IRA distributions, the highest in the nation for single filers with $100,000 in annual retirement income.

Add to this math an income tax that can top out at 9.9% on any income over %125,000 for single filers. The only pluses might be that Oregon does exempt Social Security benefits entirely, and the state has no sales tax, but this is where the good news ends, as things go back off the rails in that Oregon has the lowest estate tax exemption of $1 million, a huge downside for anyone hoping to pass on generational wealth.

2. California

The Golden State’s top income tax rate of 13.3% is the highest in the nation, which makes it a solid number 2 on the list of worst states for retirees. There is also an additional 1% mental health tax, and while residents can exempt Social Security benefits, you also must pay state tax on any retirement income considered taxable by the federal government.

This means any 401(k) withdrawals, traditional IRA distributions, pension payments, dividend income, and capital gains all face California’s steep progressive tax burden.

Worse yet, California doesn’t offer any special exclusions for retirement income regardless of age. 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 standard of living.

1. New Jersey

With one of the highest property taxes in the country at 2.23%, New Jersey homeowners can pay over $9,500 annually in property taxes alone, more than 10 times what a homeowner in Alabama would pay on a similarly priced home. For retirees who are on a fixed income, this single expense could eat up a big portion of an annual budget.

There is some help with a federal AGI of $150,000 or less for deducting $75,000, while joint filers earning over $100,000 can deduct $50,000 in income from public or private pensions and retirement accounts, which can help lower and middle-income retirees.

However, retirement income above the exclusion amount faces the state income tax of 10.75%, the fourth highest in the nation. Recent studies have consistently ranked New Jersey among the worst states for retirement due to its combined tax burden and high cost of living.

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