The Bottom Line: State Taxes Create a Clear Winner for Retirees
A married couple withdrawing $100,000 annually from traditional IRAs would pay about $1,412.50 in Arizona state income tax, compared to nothing in Nevada. This difference highlights how state-level decisions on retirement income directly shape the long-term financial stability of seniors across the country.
While federal laws govern the creation and taxation of Individual Retirement Accounts, state policies create a patchwork environment that can significantly alter a retiree’s net income. The contrast between Arizona and Nevada illustrates this divide clearly. One state imposes a flat rate on withdrawals, while the other prohibits any personal income tax entirely.
Investors will note that these policy differences are not merely theoretical; they represent thousands of dollars over a lifetime. For a retiree choosing where to live in the final chapter of their life, the cost of living includes more than just housing and food. The structure of state tax codes determines how much of their hard-earned savings remains available for medical needs, travel, and daily expenses.
Nevada Bans Personal Income Tax Entirely
Nevada’s constitution prohibits any income tax on the wages or personal income of individuals under Article 10, Section 1. This constitutional ban means that IRA withdrawals and Social Security benefits go untaxed at the state level within Nevada borders.
The state structure ensures that retirees do not face additional burdens when accessing their nest eggs. This approach stands in stark contrast to jurisdictions that view retirement income as taxable ordinary earnings. By eliminating this layer of taxation, Nevada offers a predictable environment where the principal amount withdrawn remains intact before being spent.
This policy extends beyond just IRA distributions. The state tax code treats all forms of personal income with the same exemption. Consequently, Social Security benefits and wages earned by working seniors remain free from state-level interference. This comprehensive approach removes uncertainty for retirees planning their post-work years in the Silver State.
Arizona Applies a Flat Rate With Specific Deductions
Arizona taxes every filer at a flat 2.5%, according to the Arizona Department of Revenue. IRA withdrawals count as ordinary income under this system, while Social Security retirement benefits are excluded from Arizona income under state law.
HB 4168, signed by Governor Hobbs on June 13, 2026, set Arizona’s joint standard deduction at $31,500. This provision applies retroactively to tax years after 2024, providing a baseline reduction for taxable income before the flat rate calculation begins.
The legislation also added a subtraction from income under A.R.S. § 43-1022 that mirrors the federal senior deduction in IRC § 151(d)(5)(C). This benefit provides $6,000 for each spouse who turns 65 by year end and covers the period from 2025 through 2028. The enacted statute makes this subtraction required rather than optional.
The $6,000 subtraction in Arizona is reduced by 6% of modified adjusted gross income above $150,000 for joint filers. Married couples have to file jointly and list each qualifying spouse’s Social Security number to receive this benefit. Arizona exempts Social Security benefits from taxation, but the federally taxable share of those benefits still counts toward MAGI for the purpose of calculating the senior subtraction.
The Financial Impact on a Retired Couple
A flat rate on the whole withdrawal would suggest $2,500 in tax liability. However, once deductions apply, the bill comes to about $1,412.50 for a couple withdrawing $100,000 annually from traditional IRAs. That figure covers only state income tax.
Property, sales and vehicle taxes are left out of this specific calculation, as each of those differs between the two states. The gap in income tax is real, but it is small next to the property tax differences between the two places. Retirees must weigh these various costs when selecting a residence.
California keeps taxing the same withdrawals until move day under graduated brackets. The Tax Foundation’s 2025 index places California 49th on individual income tax, compared with 8th for Arizona and 7th for Nevada. This ranking reflects the different philosophies held by each state regarding retirement income.
Traditional IRAs in the United States are a type of retirement savings plan offered by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer’s earned income for the taxpayer’s eventual benefit in old age. Other arrangements include individual retirement annuities and employer-established benefit trusts.
The Economic Recovery Tax Act of 1981 opened traditional IRAs to all taxpayers, expanding access beyond self-employed individuals who were initially targeted by the Employee Retirement Income Security Act of 1974. The Roth IRA was created by the Taxpayer Relief Act of 1997 and allows for non-deductible contributions where earnings may be withdrawn tax-free in retirement.
These federal mechanisms provide the foundation, but state laws determine the final cost to the retiree. The figure that matters is what remains in the account after all local obligations are met. Seniors planning their move must calculate these specific numbers rather than relying on general assumptions about retirement living costs.
Policy Differences Influence Where Retirees Choose to Live
The challenges of saving for retirement, including lack of access and limited benefit from federal tax incentives, are unevenly distributed. Black/African American and Hispanic/Latino workers, women, and workers without a college degree are more likely to face these hurdles than are white workers, men, and those with a college degree.
These demographic realities add weight to the importance of state tax policies. A policy that benefits high earners may not help those relying solely on Social Security and IRA distributions. Arizona exempts Social Security, but the federally taxable share of benefits still counts toward MAGI for the senior subtraction calculation.
Congress and state lawmakers have instituted a range of policies over the decades to help people save more. Giving people more access to a retirement savings plan is arguably one of the most significant steps policymakers can take. However, the final layer of taxation rests with the state where the retiree resides.
Arizona taxes IRA withdrawals as ordinary income, but Social Security benefits are excluded from state income tax. This distinction is critical for retirees relying heavily on government benefits. The $6,000 subtraction in Arizona is reduced by 6% of modified adjusted gross income above $150,000 for joint filers.
The bottom line is that location choices carry significant financial consequences. A couple choosing between Henderson, Nevada, and Arizona faces a different tax bill on the same withdrawal amount. The gap is real, but it is small next to the property tax differences between the two places.
Sources
- Arizona Charges a Flat 2.5% on IRA Withdrawals and Nevada Charges Nothing. Here's What the Gap Is Worth to a Retired Couple
- Individual retirement account
- Making Automated Savings Plans Available Nationwide Is a Critical Step Toward Real Retirement Security
Photo: Rhoda Baer (Photographer) (Public domain)
