Partly taxed
How Alabama taxes retirement income
Alabama is one of the friendliest states for people with a traditional pension. Payments from a defined benefit plan are exempt from Alabama income tax, whether the plan is the Teachers’ Retirement System or Employees’ Retirement System of Alabama, a pension from another state, a federal pension or a company pension. Social Security is not taxed either.
The line Alabama draws is between defined benefit plans and account-based plans. Withdrawals from 401(k), 403(b) and 457(b) accounts and IRAs are taxable, although residents 65 and older can exclude a set amount of that retirement income each year. Benefits from nonqualified defined benefit plans, such as excess benefit plans, are exempt too.
Alabama’s income tax runs from 2% to 5%. Homeowners 65 and older are exempt from the state portion of property tax on their home, and those with low incomes can be exempt from all property tax on it.
Questions
Does Alabama tax TRS or ERS pensions?
No. Pensions from defined benefit plans, including the Teachers’ and Employees’ Retirement Systems of Alabama, are exempt.
Does Alabama tax 401(k) and IRA withdrawals?
Yes, mostly. Residents 65 and older can exclude a set amount of this income each year, and the rest is taxed at Alabama’s normal rates.
Does Alabama tax Social Security?
No.