Retirement Income Tax Guidance

On March 1, 2022, Governor Kim Reynolds signed House File 2317. Division VI of that legislation excludes retirement income from Iowa taxable income for eligible taxpayers for tax years beginning on or after January 1, 2023. This guidance describes some of those changes. The Iowa Department of Revenue (Department) will update this guidance and administrative rules in the near future to implement these changes.

  • To qualify for the retirement income exclusion, the taxpayer must be:

    1. 55 years of age or older on December 31 of the tax year, or
    2. Disabled, or
    3. A surviving spouse or a survivor having an insurable interest in an individual who has 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 retirement income exclusion is only applicable to a spouse who meets one of the above conditions. If one spouse does not meet one of the above conditions, retirement income attributable to that spouse is not eligible for the exclusion. If both spouses meet one of the above conditions, the taxpayers may exclude all eligible retirement income.

  • 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….” 

    The Department is in the process of drafting administrative rules to further explain which types of retirement plans qualify for the retirement income exclusion. As of now, the Department has determined that distributions from the following plans qualify for the exclusion:

    • Distributions from individual retirement plans (IRA) authorized under section 408 of the Internal Revenue Code (IRC)
    • Distributions from a simplified employee pension (SEP) plan;
    • Distributions from a savings incentive match plan for employees (SIMPLE) retirement plan;
    • Distributions from a Keogh plan;
    • 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 a 401(k), 403(b), and 457(b) plan; 
    • Annuity distributions pursuant to IRC section 402(a).
    • Distributions from an Employee Stock Ownership Plan (ESOP) as defined in section 4975(e)(7) of the IRC

    If you have questions about whether a plan not listed above qualifies under the retirement income exclusion, please submit a tax guidance request.

  • The Department will administer withholding on retirement income in accordance with Iowa Administrative Code rule 701–307.1(2). Under the rule, no state income tax withholding is required when nonwage payments to residents to the extent those retirement income payments are not subject to state income tax. Based upon this administrative rule, the Department takes the position that Iowa income tax is not required to be withheld on distributions of qualifying retirement income made to eligible payees.

    If a payee does not qualify for the retirement income exclusion, the plan administrator is required to withhold Iowa income tax from these payments on the basis of tables and formulas available on the Department’s Withholding Tax Information page or withhold Iowa income tax from these payments at the rate of 5 percent.