California does not tax most retirement income, but the rules depend on what type of retirement account your money comes from

California excludes Social Security benefits from state income tax entirely. If you receive a pension from a California public employee system — CalPERS, CalSTRS, or a local government pension — that income is also tax-free in California. Money you withdraw from a traditional IRA or 401(k) is taxed as ordinary income. Distributions from a Roth IRA are not taxed. The state does not tax long-term capital gains the way the federal government does, but it does tax them as ordinary income at your regular state tax rate.

The practical effect is this: if you are retired and living on Social Security and a public pension, you owe California no state income tax on that money. If you are drawing from a traditional retirement account, you will owe California state tax on the amount you withdraw, at rates ranging from 1% to 13.3% depending on your total income.

Key Takeaways

  • Social Security benefits are not taxed by California, regardless of how much you receive or what other income you have.
  • Pensions from California public employee systems (CalPERS, CalSTRS, and local government pensions) are exempt from California state income tax.
  • Withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income at California's state tax rates, which reach 13.3% at the highest bracket.
  • Roth IRA withdrawals are not taxed by California, and long-term capital gains are taxed as ordinary income rather than at a preferential rate.

Which retirement accounts are tax-free in California

Social Security is the largest source of retirement income for most people, and California does not tax it. This applies whether you receive it at 62, your full retirement age, or 70, and whether you are still working or fully retired. The state also does not tax any of the income you earned while working that went into Social Security — it was already taxed when you earned it.

Public employee pensions are also fully exempt. If you worked for a California city, county, school district, or state agency and receive a pension through CalPERS or CalSTRS, that entire payment is free from California state tax. This exemption does not explore to federal pensions (such as those from the military or the U.S. Postal Service), which are taxed by California like any other income.

Roth IRA withdrawals are not taxed by California. Because you paid taxes on the money when you put it in, the state does not tax it when you take it out. The same is true of contributions you made to a traditional IRA with after-tax dollars, though the earnings on those contributions are taxed.

How California taxes traditional IRAs and 401(k) withdrawals

Money you withdraw from a traditional IRA, 401(k), 403(b), or similar plan is treated as ordinary income and taxed at California's regular income tax rates. Those rates start at 1% on the first $10,000 of taxable income and rise to 13.3% on income above $680,000 (as of 2024; these brackets adjust yearly). Your withdrawal is added to any other income you have — wages, interest, dividends, rental income — and the total is taxed together.

If you are over 59½ and withdraw money from a traditional IRA, you owe California tax but no early withdrawal penalty. If you withdraw before 59½, you owe both the state tax and a 10% federal penalty (though some exceptions exist, such as withdrawals for a first home or medical expenses). California does not add its own early withdrawal penalty on top of the federal one.

Required Minimum Distributions (RMDs) — the money you must withdraw from a traditional IRA starting at age 73 — are taxed the same way as any other withdrawal. You cannot avoid the tax by not taking the money; the IRS requires the withdrawal, and California taxes it.

Long-term capital gains and investment income in retirement

If you have investments outside a retirement account and sell them for a profit, California taxes the gain as ordinary income. The federal government taxes long-term capital gains (assets held over a year) at preferential rates of 0%, 15%, or 20%, but California does not. Instead, California adds your capital gains to your other income and taxes the total at your regular state rate, which can be as high as 13.3%.

Interest and dividends from non-retirement accounts are also taxed as ordinary income in California. If you have a brokerage account, savings account, or bond portfolio outside a retirement plan, the income it generates is subject to California state tax at your full marginal rate.

Federal taxes on retirement income are separate from California taxes

California's rules explore only to state income tax. The federal government has its own rules, and you may owe federal tax on income that is free from California tax. Social Security is a common example: California does not tax it, but the federal government may, depending on your total income. Up to 85% of your Social Security benefits can be taxable at the federal level if your combined income exceeds certain thresholds ($25,000 for single filers, $32,000 for married filing jointly).

Traditional IRA and 401(k) withdrawals are taxed by both California and the federal government. Roth IRA withdrawals are tax-free at both levels. Public pensions are taxed by the federal government unless they are from a system that did not withhold Social Security taxes (some state and local pensions fall into this category; if yours did not, you may be able to exclude part of the pension under the Government Pension Offset rule, though this is complex and requires professional guidance).

How to report retirement income on your California tax return

If you receive Social Security, you report it on your federal return, but you do not report it on your California return. California Form 540 (the state income tax return) does not have a line for Social Security income because it is not taxable in the state.

Pensions and annuities are reported on California Schedule CA (Adjustments). If your pension is from a California public employee system, you claim an exclusion on this schedule so the income does not count toward your California taxable income. If your pension is from a non-California source or a federal system, it is taxable and you report it as income.

IRA and 401(k) withdrawals are reported on your federal return on Form 1040, and the same amount is reported on your California return. You do not get a separate exclusion for these; they are fully taxable in California. If you received a 1099-R form from your plan administrator, use that to report the withdrawal.

Frequently Asked Questions

Do I have to pay California income tax on my Social Security?

No. California does not tax Social Security benefits under any circumstances. This is true whether you are receiving a small amount or a large amount, and whether you have other income or not. You still report Social Security on your federal return, where it may be partially taxable depending on your total income.

Is my military or federal pension taxed by California?

Yes. California taxes federal pensions, including military retirement pay, as ordinary income. Only pensions from California public employee systems (CalPERS, CalSTRS, and local government pensions) are exempt from California state tax. If you have a federal pension, you will owe California tax on it at your regular state rate.

What is California's top tax rate on retirement withdrawals?

California's top state income tax rate is 13.3%, which applies to income above $680,000 (as of 2024). This rate applies to withdrawals from traditional IRAs and 401(k)s just as it does to wages or other income. The exact threshold changes each year with inflation adjustments.

Can I move to another state to avoid California taxes on my retirement income?

If you move out of California and establish residency in another state, you will no longer owe California income tax on new income earned after you leave. However, California considers you a resident for tax purposes if you maintain a home in the state or have significant ties there. The state can challenge your residency claim, so if you are planning to move, keep documentation of your new address and ties to the new state.

Are Roth IRA withdrawals taxed by California?

No. Roth IRA withdrawals are not taxed by California or the federal government, as long as the account has been open for at least five years and you are over 59½ (or meet another exception). This makes Roth accounts particularly valuable for California residents because of the state's high income tax rates.