Retirement Income Tax Guidance

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.

On February 20, 2023, Governor Kim Reynolds signed Senate File 181. Division III of this legislation amends Iowa Code section 422.16 to clarify that state income tax withholding is not required on distributions of retirement income that are not subject to Iowa income tax. Thus, plan administrators are not required to withhold Iowa tax on distributions from qualifying plans to qualifying recipients.

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.

Individuals who qualify for the retirement exclusion and believe tax on their retirement income is being erroneously withheld should contact their plan administrator to request a refund of erroneously withheld Iowa income tax and request that the administrator stop withholding Iowa income tax on future payments. The plan administrator may require the individual to complete a new IA W-4P claiming exemption from withholding. 

Any amounts that were correctly withheld, or that were erroneously withheld and you did not notify your plan administrator about in 2023, should be reported on your 2023 Iowa income tax return and may be refundable to the extent the withheld amount exceeds your Iowa income tax liability.

Plan administrators who are aware that they have erroneously withheld Iowa income tax on qualifying retirement income in 2023 must repay the overwithheld amount to the recipient by the end of 2023. Plan administrators have two options:

• Refund the overwithheld amount directly to the recipient and obtain a written receipt showing the date and amount of the repayment from the recipient. The plan administrator may then file an amended withholding tax return and request a refund of tax paid that was not due.
• Apply the overwithheld amount against future tax required to be withheld on distributions to the recipient in the calendar year, if any. If the recipient does not have any income from the plan administrator subject to Iowa income tax, the plan administrator must use the first option. 

If the amounts were not erroneously withheld, or if the plan administrator learns of the error in 2024, they should file a 1099-R with the Department and furnish a 1099-R to the taxpayer reporting the amount withheld in 2023. The taxpayer should file their 2023 Iowa income tax return as usual to report the amount withheld and seek a refund.