Tax-friendly states for retirees

With the baby boom generation entering retirement by the thousands each day, many are considering not only how to spend their golden years, but where.

It may be no surprise that Florida is maintaining its hold as a retirement destination. Not only does the state offer favorable tax treatment for retirement income, but weather and a high concentration of other seniors appeal to many who are hitting their retirement years. In 2014, Florida's The Villages retirement community saw its population rise more quickly than other census area in the U.S.

Moving isn't an easy task, however, and many other factors come into play besides taxes, ranging from weather to the quality of local health care. More Americans are also realizing the importance of having family or friends nearby in case of a health emergency, with ailments more likely to crop up as people age.

About half of nonretired adults said they would consider moving to another city or state when they retire, although the least likely group to say they would be willing to move are the Silent Generation, whose oldest members are in their early 90s, according to a new Bankrate.com survey.

"There are a lot of factors to consider when determining where you want to live in your retirement years," said Rocky Mengle, senior state tax analyst at Wolters Kluwer Tax & Accounting. "Proximity to friends and family, weather, access to decent health care. But I would advise people to look at the state tax liability. It can be an important factor, especially if someone is living on a fixed income and has to stretch their dollars."

So what does it mean to be a tax-friendly state for retirees? These are states that exclude both Social Security income and pension income from taxation. To be sure, other taxes can make a dent in one's finances, including the estate tax and sales tax. Retirees who rely on income from other sources, such as real estate, may be taxed at higher rates.

Social Security is a major source of income for six of 10 retirees, according to a 2016 Gallup poll. Almost four of 10 said traditional pension plans provide a major source of income in their retirements. Those two sources were cited as the most important to retirees, Gallup found.

Only 13 states tax Social Security income, according to Wolters Kluwer. They are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia

Read on to learn more about the states with the most favorable tax treatment for Social Security and pension income.

Alaska

Alaska has the goods when it comes to favorable treatment of retirement income. Neither Social Security income nor pension income is taxed in the state, and it has no inheritance tax.

The downsides? Alaska's cost of living is relatively high, and the weather is far from balmy. Those two issues explain why it's ranked 50th in Bankrate's survey of the top states for retirees, which included taxes as one of several measures. Alaska also scored poorly for crime and health care, Bankrate said.

Florida

The Sunshine State is most often associated with retirement in America, and for good reason. Florida's population boomed as seniors flocked within its borders to enjoy sunny weather and low taxes. The state excludes Social Security income and pension income from taxation.

Still, Florida only ranked 17th in Bankrate's survey. While it doesn't have an estate tax, its sales taxes can be relatively high. And although it has a high concentration of senior citizens -- which Bankrate considers positive -- it didn't break the top 10 rankings in any other categories, such as health care quality or culture.

Illinois

Social Security income is exempt from state taxes, and federally qualified pension plan income is also generally free from taxation in Illinois. While the state does have an estate tax, it excludes estates worth less than $4 million.

According to Bankrate, Illinois is the 34th best location for retirees. While its taxes might be favorable for the senior set, its weather can't compete with warmer states like Florida.

Mississippi

Neither Social Security income nor pension income are taxed in Mississippi. It also doesn't have an estate tax.

Still, Mississippi's tax treatment gets a few dings. For one, it's among a handful of states that charge sales tax on groceries. Its sales tax, at 7 percent, gives Mississippi the second-highest state sales tax in the country, following California.

Mississippi ranks 41st on Bankrate's rankings, despite a low cost of living and tax burden. The state suffers from poor ratings for culture and quality of health care.

Nevada

Nevada doesn't tax Social Security or pension income, nor does it have an estate tax. Still, the state sales tax is relatively high at 6.85 percent.

But adding in other factors, Nevada ranks 44th as a retirement destination, according to Bankrate. While its tax burden is lower than other states, Nevada is dinged on quality of health care.

The state's population growth means it has fallen below the national rates of medical doctors per 100,000 residents, according to the Las Vegas Review-Journal.

Pennsylvania

Social Security income gets a pass from Pennsylvania's tax authorities, and pension income generally isn't taxed either, although some age restrictions apply. IRA distributions aren't taxed if the payments are received after the resident reaches at least 59 1/2 years old.

Pennsylvania does have an estate tax, although it excludes inheritances passed to spouses or to children younger than 21. Direct descendants are taxed at 4.5 percent, while siblings pay a 12 percent tax. The state's sales tax stands at 6 percent.

So how does Pennsylvania stack up on other retirement benchmarks? Overall, it ranks 15th in Bankrate's standing. The state takes some hits due to weather, and it's in the middle of the pack for culture.

South Dakota

Neither pensions nor Social Security income are taxed in South Dakota, and its inheritance tax was repealed more than a decade ago. Its state sales tax stands at 4 percent.

Even though the weather in South Dakota can be fierce, the state placed 8th in Bankrate's rankings on retirement. A low cost of living, low crime and high culture rankings helped boost the state into the top 10.

Washington

Neither Social Security nor pension income are taxed in Washington state. However, it does have an inheritance tax for estates valued at more than $2 million. Washington's sales tax stands at 6.5 percent.

While retirement income may be taxed lightly, the state ranks 31st in Bankrate's survey. A relatively high cost of living, poor weather -- all that rain -- and low cultural rankings took a toll on Washington's standing.

Wyoming

Social Security and pension income are exempt from taxes in Wyoming, which also doesn't have an estate tax. The state sales tax rate stands at 4 percent.

Wyoming ranks 21st in Bankrate's survey, helped by its low crime rate and sunny days.