How Colorado Taxes Retirement Income (2026)

Colorado is a middle-of-the-road state for retirees on taxes. It has a flat income tax (4.4% for 2025; the rate can change in years when the state's revenue exceeds its constitutional cap), no estate or inheritance tax, and a deduction for retirement income that depends on your age. Understanding that deduction, which the state calls the pension and annuity subtraction, is the first step in planning withdrawals here.

The pension and annuity subtraction

Colorado lets you subtract a portion of your retirement income from the income the state taxes. The limit depends on your age at the end of the tax year. Under 55, nothing is subtractable, with a narrow exception for death benefits. From 55 to 64, you can subtract up to $20,000 per person. At 65 and older, the limit rises to $24,000 per person.

"Retirement income" for this purpose includes pensions, annuity payments, and taxable withdrawals from IRAs and 401(k)s. Each spouse on a joint return gets their own limit, measured at their own age. A couple both over 65 can subtract up to $48,000 of retirement income between them, but one spouse cannot use the other's unused portion.

Social Security

Social Security gets its own treatment, and it has improved. If you are 65 or older, the federally taxable part of your Social Security benefit is fully subtractable in Colorado, with no cap, for tax years 2022 and later. Beginning with tax year 2025, people age 55 to 64 also get the full subtraction, but only if federal adjusted gross income is $75,000 or less for a single filer or $95,000 or less for a joint return. This is a cliff, not a phase-out: one dollar over the line and your Social Security falls back under the $20,000 cap along with your other retirement income.

That cliff matters for anyone retiring before 65 who is considering a Roth conversion. A conversion raises adjusted gross income in the year it happens, and for a 60-year-old couple near the $95,000 line it can push Social Security back into the capped bucket for that year.

What it means for your withdrawal plan

A few practical points follow from these rules. First, the subtraction is per person, so a couple with retirement income concentrated in one spouse's IRA may leave part of the other spouse's subtraction unused. Second, the limit is a cap, not a rate; income above it is taxed at the flat rate. Third, because Colorado taxes IRA withdrawals and Roth conversions the same way, the state's rules affect the timing of conversions but rarely the decision itself, which is driven by federal brackets.

Colorado also offers property tax relief to older homeowners through the senior homestead exemption, and the rules there have their own residency requirements. That is a separate topic.

If you want to see how the subtraction applies to your own accounts, bring a recent tax return to an Income Design Session and we will walk through it together.

Tax rules change; consult a tax professional about your situation. This article is for general education only and is not investment, tax, or legal advice. Investment advisory services are offered through Foundations Investment Advisors, LLC, an SEC-registered investment adviser. Investments involve risk, including possible loss of principal.