It’s True: Iowa No Longer Taxes Retirement Income

Retirees provide countless hours of volunteer service and contribute to the culture of Iowa. Eliminating their retirement income taxes will encourage them to remain in the state.

Last year, the Iowa Legislature passed an historic tax reform measure covering a variety of income sources. This legislation was not only the largest tax cut in Iowa history, but also the most comprehensive tax reform in the entire nation.

A flat 3.9 percent income tax will replace the progressive nine-bracket income tax rate system by 2026. The corporate tax will also shrink gradually, until it reaches a flat 5.5 percent. On top of these reforms, retirement income will become exempt from taxation starting this year. Although it is perhaps difficult for some Iowans to believe, our state will no longer tax retirement income.

“Beginning in tax year 2023, the tax liability for nearly 295,000 Iowa taxpayers will be eliminated under the retirement provision of this new tax law,” stated Governor Reynolds. This reform will not only allow more retired Iowans to keep their hard-earned income, but by doing so, also encourage them to remain in the state. Iowa continually loses retirees to other states, especially Florida and Arizona, which promise better tax codes on top of their warmer climates.

Iowa’s Department of Revenue recently released guidance to clarify some of the questions surrounding the new policy. Taxpayers will qualify if the they are:

• 55 years of age or older on December 31 of the tax year,
• Disabled, or
• A surviving spouse or other survivor having an insurable interest in an individual who qualified for the exclusion in the tax year on the basis of age or disability. (A survivor other than the surviving spouse is considered to have an “insurable interest” if the survivor is a son, daughter, mother, or father of the annuitant or pensioner.)

For married couples, the exclusion applies only to the retirement income of a spouse who meets one of the above conditions. For example, if one spouse retires before the age of 55, the exclusion would not apply just because the other spouse is over that threshold or disabled.

The Department of Revenue also confirms the retirement income exclusion covers “governmental or other pension or retirement plan[s] including defined benefit or defined contribution plans, annuities, individual retirement accounts, plans maintained or contributed to by an employer, or maintained or contributed to by a self-employed person as an employer, and deferred compensation plans or any earnings attributable to the deferred compensation plans.”

More specifically, the following are exempt from taxation:

• Distributions from individual retirement plans (IRA) authorized under section 408 of the Internal Revenue Code (IRC),
• Distributions from simplified employee pension (SEP) plans,
• Distributions from savings incentive match plan for employees (SIMPLE) retirement systems,
• Distributions from Keogh plans,
• Distributions from qualified pension plans, as described in Treasury Regulation section 1.401-1(b)(1)(i), including IPERS,
• Roth conversion income,
• Distributions from qualified deferred compensation plans governed by the Employee Retirement Income Securities Act (ERISA), including sections 401(k), 403(b), and 457(b),
• Annuity distributions pursuant to IRC section 402(a), and
• Distributions from Employee Stock Ownership Plans (ESOPs), as defined in section 4975(e)(7) of the IRC.

Iowa joins 12 other states that currently do not tax retirement income. These include nine states that don’t tax individual income of any kind, as well as Illinois, Mississippi, and Pennsylvania, which do not tax income from 401(k) plans, IRAs, or pensions.

Retirees are the foundation of many communities across Iowa. They provide countless hours of volunteer service and contribute to the culture of Iowa. Eliminating their retirement income taxes may not prevent some from seeking to escape our cold winters, but an improved tax climate will give them reason to stick around for the rest of the year.