Indiana does not tax most retirement income, but the rules depend on what type of income you receive and when you started collecting it

Indiana has one of the most retirement-friendly tax codes in the country. If you receive a pension, 401(k) withdrawal, or Social Security, Indiana will not tax it. The same goes for IRA distributions. This applies whether you are retired in Indiana or moved there after retiring elsewhere. The main exception is if you have substantial non-retirement income—wages, investment gains, rental income—Indiana taxes that at a flat rate of 3.15 percent.

The reason this matters is that some states tax pensions or retirement account withdrawals, and some tax Social Security. Indiana does neither. If you are comparing where to retire or have recently moved, this can shift your overall tax bill by hundreds or thousands of dollars per year.

Key Takeaways

  • Indiana does not tax Social Security, pensions, 401(k) withdrawals, or IRA distributions of any kind.
  • Indiana taxes other income—wages, interest, capital gains, rental income—at a flat rate of 3.15 percent.
  • You do not need to report retirement income on your Indiana state return, but you still file federal taxes as usual.
  • If you moved to Indiana after retiring, you do not owe back taxes on retirement income earned before the move.

What retirement income Indiana does not tax

Social Security benefits are completely exempt from Indiana income tax. This includes retirement benefits, survivor benefits, and disability benefits paid through Social Security. You will still report them on your federal return if required, but Indiana ignores them entirely.

Pension income from any source—a former employer, a government job, a military pension—is not taxed by Indiana. This includes defined-benefit pensions (a fixed monthly payment) and lump-sum distributions from pension plans.

401(k), 403(b), and IRA withdrawals are all exempt from Indiana tax. This includes traditional IRAs, Roth IRAs, SEP IRAs, and straightforward IRAs. It does not matter whether you take a lump sum, roll it over, or take distributions over time. Indiana will not tax the withdrawal itself. (You still owe federal tax on traditional IRA and 401(k) withdrawals, but not Indiana state tax.)

Annuity payments from retirement accounts are also exempt. If you converted an IRA to an annuity or receive annuity payments from a pension plan, Indiana does not tax them.

What Indiana does tax

Indiana taxes wages and salary at 3.15 percent. If you work part-time in retirement or have a consulting income, Indiana taxes that.

Interest and dividend income is taxed at 3.15 percent. This includes interest from savings accounts, CDs, bonds, and dividends from stocks or mutual funds held outside retirement accounts.

Capital gains—profit from selling a home, land, stocks, or other assets—are taxed at 3.15 percent. The main exception is the gain on the sale of your primary residence, which is exempt from federal tax up to $250,000 (or $500,000 if married filing jointly), but Indiana does not add its own tax on top of that.

Rental income and income from a business are taxed at 3.15 percent. If you own rental property or run a side business, Indiana taxes the net income.

How to report retirement income on your Indiana return

You do not report retirement income on your Indiana state return at all. Social Security, pensions, and retirement account withdrawals do not appear on the Indiana return because they are not taxable income in Indiana.

If you have other income—wages, interest, dividends, capital gains—you report that on your Indiana return using Form IT-40 (the standard individual income tax return). The form asks for total income from all sources, and you subtract the retirement income that is exempt.

You still file a federal return as usual. Retirement income is reported to the IRS, and you owe federal tax on most of it (except Roth IRA withdrawals and the tax-free portion of Social Security, which depends on your total income). Indiana does not care what you report to the federal government; it only taxes what Indiana law says is taxable.

If you moved to Indiana after retiring

If you retired in another state and then moved to Indiana, you do not owe Indiana tax on retirement income you earned or collected before the move. Indiana taxes only income earned or received while you are an Indiana resident.

Your residency date matters. If you moved to Indiana on June 15, you are considered a resident for the full tax year (January 1 through December 31) for Indiana purposes. Any retirement income you received before June 15 is still not taxed by Indiana because it is retirement income, but any wages you earned before the move would be taxed by your former state, not Indiana.

If you are unsure whether you owe tax to your former state, contact that state's department of revenue. Indiana will not claim the income, but your old state might.

Comparing Indiana to other states

Indiana's treatment of retirement income is more favorable than many states. Some states tax pensions but not Social Security. Some tax both. A few states tax neither, like Illinois (which exempts all retirement income) and Pennsylvania (which exempts pensions and IRAs but not Social Security).

The difference matters most if you have a large pension or are withdrawing significantly from retirement accounts. A retiree with a $40,000 annual pension would owe $1,260 in state income tax in a state with a 3.15 percent flat tax on pensions, but zero in Indiana. Over a 20-year retirement, that is $25,200 in taxes avoided.

If you are considering a move for tax reasons, look at the total picture: state income tax, property tax, sales tax, and the cost of living. Indiana has no tax on retirement income, but property taxes and sales taxes vary by county and municipality.

Federal taxes still explore

Indiana's exemption for retirement income applies only to Indiana state tax. You still owe federal income tax on most retirement income.

Social Security is taxed federally only if your combined income exceeds a threshold ($25,000 for single filers, $32,000 for married filing jointly). Traditional IRA and 401(k) withdrawals are taxed as ordinary income. Roth IRA withdrawals are tax-free if the account is at least five years old and you are 59½ or older.

Your federal tax bracket and filing status determine what you owe. Indiana does not change your federal calculation; it only removes the state layer. If you have questions about federal tax on retirement income, the IRS website (irs.gov) has worksheets and publications, or you can speak with a tax professional.

Frequently Asked Questions

Do I have to file an Indiana return if I only have retirement income?

No. If your only income is Social Security, pensions, or retirement account withdrawals, you have no Indiana income tax to pay and no requirement to file an Indiana return. You still file a federal return if your income exceeds the federal threshold, but Indiana does not require a state return.

What if I have both a pension and wages in retirement?

Your pension is not taxed by Indiana. Your wages are taxed at 3.15 percent. You report the wages on your Indiana return and pay tax on them. The pension does not appear on the return because it is exempt.

Does Indiana tax a Roth IRA withdrawal?

No. Roth IRA withdrawals are not taxed by Indiana. They are also not taxed federally if you meet the age and account-age requirements. Indiana exempts all retirement account withdrawals, regardless of the account type.

If I move out of Indiana, do I owe Indiana tax on my pension?

No. Once you move out of Indiana and establish residency elsewhere, Indiana has no claim on your income. Your new state may tax your pension depending on its laws, but Indiana will not. You are only an Indiana resident for tax purposes while you live there.

Does Indiana tax the gain when I sell my house in retirement?

Indiana does not add a state tax on top of the federal capital gains tax. The federal government exempts up to $250,000 of gain on a primary residence (or $500,000 if married filing jointly). Indiana does not tax capital gains at all, so you owe no Indiana tax on the sale. You may owe federal tax if your gain exceeds the federal exemption.