Which states don't tax 401k withdrawals?

You can avoid the mandatory 20% federal tax withholding on a 401(k) withdrawal by doing a direct rollover of the funds into another qualified retirement plan or an Individual Retirement Account (IRA).

How the 20% Withholding Works

• Prepayment only: The 20% is not the final tax you owe; it is a mandatory prepayment of federal income tax that employers must withhold on eligible rollover distributions paid directly to you.
• The 60-day rule trap: If you take a cash payout instead of a direct transfer, your plan withholds 20%. To avoid owing taxes and a potential early withdrawal penalty, you have 60 days to deposit the entire original amount (including the 20% that was withheld using your own out-of-pocket cash) into a new retirement account.

Ways to Avoid the 20% Withholding

• Direct (Trustee-to-Trustee) Rollover: Ask your 401(k) administrator to send the money directly to your new IRA or another employer's plan. Because the money never touches your hands, 0% is withheld.
• Roll Over to an IRA Then Withdraw: If you need actual cash rather than a continuous retirement investment, roll the funds over to a traditional IRA via a direct transfer first. IRAs are not subject to the mandatory 20% withholding rule, allowing you to control or opt out of withholding when you later take a distribution from the IRA. (Note: You will still owe ordinary income tax on traditional pre-tax withdrawals when you file your taxes).
• Take a 401(k) Loan: If your employer's plan allows it, you can borrow from your 401(k) without triggering a taxable distribution or withholding, provided you pay it back within 5 years.

A "good" 401(k) balance at age 65 depends on your lifestyle and other income sources, but major financial firms recommend aiming for about 8 to 10 times your annual salary.

Recommended Savings Milestones

• 10x Income Goal: Fidelity Investments suggests saving 10 times your yearly pre-tax salary by age 67 (or roughly 8x to 9x by age 65). If you earn $80,000 a year, your target is around $800,000.
• The "Actual" Average: Data from major retirement providers like Vanguard shows that the average 401(k) balance for Americans age 65 and older is about $272,000 to $299,000.
• The Median Reality: The median balance (the midpoint where half have more and half have less) for people age 65+ is much lower, sitting around $88,000 to $95,000. This shows many people fall short of ideal industry targets.

Context Matters

• Low Expenses/Pensions: If you have a traditional pension or a paid-off home and low living costs, a balance of $500,000 combined with Social Security can be plenty.
• High Expenses/No Pension: If you plan to rent, have high medical costs, or want an extravagant lifestyle, even $1 million might feel tight.

Yes, $6,000 a month ($72,000 a year) is a good retirement income that comfortably exceeds national spending averages for most retirees.

How $6,000 Compares to Averages

• National Spending: The Bureau of Labor Statistics reports that average annual spending for households aged 65 and older is about $61,400 (roughly $5,100 a month).
• Income Tiers: Financial experts generally sort retirement budgets into tiers. Basic essentials cost $4,000 to $6,000 a month, while a comfortable lifestyle sits between $6,000 and $8,000 a month.
• Social Security: The average individual Social Security benefit is around $2,000 a month, meaning $6,000 gives you a large buffer beyond government support.

You can read more detailed spending breakdowns in this guide from U.S. News.

When $6,000 is Great

• No Housing Debt: Your money goes much further if your mortgage is paid off.
• Low-Cost Area: Living in a smaller town or a state with low taxes makes $6,000 feel like a luxury income.
• Single Person: For one person, $72,000 a year provides high purchasing power for hobbies and travel.

When $6,000 Might Feel Tight

• High-Cost Area: Major cities or states with high property taxes and healthcare costs eat up $6,000 quickly.
• High Medical Expenses: Chronic health needs or uncovered medical costs can drain a fixed budget.
• Previous High Salary: If you earned $150,000+ a year before retiring, dropping to $72,000 requires a major shift in spending habits.

The worst states to retire in for taxes are typically New Jersey, New York, Connecticut, California, Nebraska, Minnesota, and Vermont, primarily due to heavy property taxes, high income tax brackets, and taxes on retirement distributions or Social Security.

High-Tax Retirement States

• New Jersey: Features the highest average property tax rates in the nation alongside steep personal income tax rates reaching up to 10.75%.
• New York: Combines high local and state income taxes with high median property tax bills and aggressive estate taxes.
• Connecticut: Imposes very high property taxes, taxes Social Security benefits for many recipients, and has an elevated cost of living.
• California: Imposes high progressive income tax rates and steep median property tax costs, while taxing pensions and retirement account withdrawals.
• Nebraska: Features high state income and property tax rates while taxing Social Security and lacking broad exemptions for other retirement income.
• Minnesota: Aggressively taxes traditional pension, 401(k), and IRA distributions, and taxes Social Security similarly to federal rules.
• Vermont: Taxes Social Security and retirement income alongside high overall property and estate tax burdens.

For context on better alternatives, many retirees look to states with no personal income tax like those detailed in the Fidelity Best States to Retire for Taxes guide.

Only about 2.5% of all Americans have $1 million or more saved in dedicated retirement accounts (like 401(k)s and IRAs), according to the Federal Reserve’s Survey of Consumer Finances.

Because nearly half of the country does not own a retirement account, the numbers shift significantly depending on which specific population is measured:

• Of all Americans: Only 2.5% have hit the $1 million mark in retirement savings.
• Of actual U.S. retirees: Roughly 3.2% have a retirement balance of $1 million or more.
• Of Americans who hold retirement accounts: Roughly 4.7% have reached a seven-figure balance.
• Of households nearing retirement (ages 55 to 64): About 9.2% of those with retirement accounts have saved $1 million or more.

The Broader Picture

While a million-dollar nest egg is a common financial benchmark, the vast majority of people fall short of it. The gap between average savings (skewed higher by a small percentage of wealthy individuals) and median savings (the true middle) shows a clearer picture of typical retirement readiness:

If you look outside of tax-advantaged retirement accounts to include all household net worth—such as primary real estate equity, businesses, and regular taxable brokerage accounts—the percentage of U.S. households that cross the million-dollar threshold rises to about 18%.