Retirement Income Tax Guidance

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

• 55 years of age or older on December 31 of the tax year, or
• Disabled, or
• 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, or
• A surviving spouse who receives amounts from a deceased spouse’s pension, regardless if the deceased spouse was 55 years of age or older or disabled, if the pension was from employment in a protection occupation, or as a sheriff, deputy sheriff, firefighter, or police officer.

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…” 

For a nonexclusive listing of retirement plans which qualify for the retirement income exclusion see Iowa Administrative Code rule 701-302.47(1). The Department has determined that distributions from the following plans qualify for the exclusion:

•  Traditional individual retirement accounts (IRA) authorized under section 408(a) of the Internal Revenue Code (IRC)
• Roth individual retirement accounts (Roth IRA) authorized under section 408A of the IRC
• Roth conversion income
• Simplified employee pension (SEP) plans defined under section 408(k) of the IRC
• Savings incentive match plans for employees (SIMPLE IRA) defined under section 408(p) of the IRC 
• Qualified deferred compensation plans including those authorized under section 401(k) of the IRC
• Eligible deferred compensation plans authorized under section 457(b) of the IRC
• Defined benefit plans, pension plans, profit-sharing plans, or stock bonus plans including IPERS and employee stock ownership plans (ESOP) authorized under section 401 of the IRC
• Distributions from a Keogh plan
• Eligible combined plans described under section 414(x) of the IRC

The Department has determined that distributions from the following plans do NOT qualify for the exclusion:

• Nonqualified deferred compensation plans described under section 409A of the IRC
• Nonqualified annuities. Note that nonqualified annuities will commonly report a code of “D” in box 7 of Form 1099-R.

If you have questions about whether a plan not listed above qualifies under the retirement income exclusion, please submit a policy 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 the withholding tables and formulas available on the Department’s Withholding Tax Information page or withhold Iowa income tax from these payments at the rate of 3.8 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, should be reported on your 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 must repay the overwithheld amount to the recipient by the end of the tax year. 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, for the period in which the tax was originally claimed, 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 same calendar year, if any. If the recipient does not have any income from the retirement plan 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 the following tax year, they should file a 1099-R with the Department and furnish a 1099-R to the taxpayer reporting the amount withheld. The taxpayer should file their Iowa income tax return as usual to report the amount withheld and seek a refund.