Colorado taxes most pensions, but the state offers a significant exemption for certain retirement income

Colorado does tax pension income as ordinary income. However, the state allows you to exclude up to $24,000 per year of may have access to retirement income — which includes pensions, 401(k) distributions, IRA withdrawals, and some annuity payments — if you meet age and income requirements. This exemption is one of the most valuable pension tax breaks in the country, but it applies only to people age 55 and older, and the income limits phase it out for higher earners.

The exemption does not explore to Social Security benefits. Colorado does not tax Social Security income at the state level, which is a separate advantage. If you receive both a pension and Social Security, you can exclude the pension portion up to the $24,000 cap while keeping your Social Security entirely tax-free.

Key Takeaways

  • Colorado allows you to exclude up to $24,000 per year of may have access to retirement income if you are age 55 or older and meet income thresholds.
  • The $24,000 exemption covers pensions, 401(k) and 403(b) distributions, traditional and Roth IRA withdrawals, and certain annuity income.
  • The exemption phases out for single filers with federal adjusted gross income over $24,000 and joint filers over $32,000.
  • Social Security income is not taxed by Colorado and does not count toward the $24,000 retirement income exemption.
  • You claim the exemption on your Colorado state tax return; it does not happen automatically.

Who qualifies for the $24,000 retirement income exemption

You must be at least 55 years old on December 31 of the tax year to claim the exemption. Age is the only hard requirement — there is no requirement to be retired, and you can still be working and earning W-2 wages while claiming it.

Your federal adjusted gross income (AGI) determines whether the full exemption is available to you. For the 2024 tax year, the exemption begins to phase out at $24,000 AGI for single filers and $32,000 for married filing jointly. Once your AGI exceeds these thresholds, the exemption reduces by $1 for every $1 of income above the limit, until it reaches zero. This means a single filer with $48,000 AGI would have no exemption left, and a joint filer with $56,000 AGI would have none.

What types of retirement income may have access to for the exemption

The exemption covers distributions from traditional IRAs, Roth IRAs, SEP IRAs, and straightforward IRAs. It also covers 401(k), 403(b), and 457 plan distributions. Pension payments from your employer or a former employer count, as do distributions from Keogh plans and profit-sharing plans.

Annuity income qualifies if the annuity was purchased with pre-tax dollars or if it is a may have access to annuity contract. Income from non-may have access to annuities — those purchased with after-tax dollars — does not may have access to for the exemption, though the portion of each payment that represents your original cost basis is not taxed anyway.

Lump-sum distributions from pensions count toward the $24,000 limit in the year you receive them. If you receive a $30,000 lump sum in a single year, you can exclude $24,000 and must report $6,000 as taxable income on your Colorado return.

How to claim the exemption on your Colorado tax return

You report the exemption on Form 104, Colorado's individual income tax return. On Schedule 1 of that form, you list your total may have access to retirement income, then subtract the exemption amount (up to $24,000, reduced by any phase-out). The result is the amount you report as taxable retirement income.

You will need documentation showing the source and amount of each retirement distribution. Your pension administrator, IRA custodian, or 401(k) plan will send you a 1099-R form showing the distribution amount. Keep these forms with your tax records. If you receive multiple distributions from different sources, add them together to reach the $24,000 cap — you cannot claim $24,000 from each source.

The exemption does not happen automatically. If you do not claim it on your return, you will pay tax on the full amount of your retirement income. If you file and miss it, you can file an amended return (Form 104-X) within three years to claim the exemption you missed and request a refund.

Interaction with federal taxes and other states

The Colorado exemption is separate from any federal tax treatment. Your federal return may allow you to exclude certain retirement income — for example, if you have a Roth IRA, those distributions are not taxable federally — but Colorado's exemption is its own benefit. You can claim both.

If you moved to Colorado from another state, your previous state may have taxed your pension differently. Some states do not tax pensions at all; others tax them fully. Colorado's exemption applies only to income you receive while you are a Colorado resident. If you were a resident of another state when you received a pension distribution, that state's rules applied then, and Colorado's rules explore now.

What happens if your income exceeds the phase-out threshold

The exemption phases out dollar-for-dollar once your AGI exceeds the threshold. This means the benefit disappears quickly for higher-income retirees. A single filer with $30,000 AGI can exclude only $18,000 (the $24,000 cap minus the $6,000 excess over the $24,000 threshold). A single filer with $50,000 AGI has no exemption left.

Your AGI includes all income sources: wages, self-employment income, capital gains, interest, dividends, and retirement distributions themselves. If you are still working part-time or have investment income, that income counts toward the threshold and reduces your exemption. Some retirees find that delaying a large distribution or spreading it across two years can keep them below the phase-out threshold.

Planning considerations for Colorado retirees

If you are age 55 or older and considering a move to Colorado, the $24,000 exemption is a real tax advantage compared to states that tax pensions fully or have lower exemptions. However, Colorado also has a 4.40% state income tax rate, which is moderate but not the lowest in the country. The exemption reduces but does not eliminate your state tax burden on retirement income.

If you have both a pension and a 401(k), you have flexibility in how you take distributions. You could take your full pension in one year and stay under the phase-out threshold, then take 401(k) distributions in later years. Or you could take smaller amounts from each source across multiple years. A tax professional can help you model different scenarios based on your specific income sources and amounts.

Frequently Asked Questions

Does Colorado tax Social Security?

No. Colorado does not tax Social Security benefits at the state level. This is separate from the $24,000 retirement income exemption. You can receive Social Security and claim the exemption on your pension or IRA distributions in the same year without any conflict.

Can I claim the exemption if I am still working?

Yes. The exemption requires you to be age 55 or older, but there is no requirement to be retired. If you are working and receiving a pension or IRA distribution, you can claim the exemption as long as your total AGI does not exceed the phase-out threshold.

What if I receive a large lump-sum pension payment?

The lump sum counts as retirement income in the year you receive it. If it is $30,000, you can exclude $24,000 and report $6,000 as taxable income. You cannot split the lump sum across multiple years for tax purposes unless your plan documents allow a partial rollover to an IRA.

Do I need to file a Colorado return if I only receive Social Security?

No. If your only income is Social Security, you do not need to file a Colorado state return. However, if you have any other income — wages, a pension, IRA distributions, or investment income — you must file if your total income exceeds the filing threshold, which varies by age and filing status.

Can I claim the exemption for a pension from a previous employer in another state?

Yes, as long as you are a Colorado resident when you receive the distribution. The exemption applies to all may have access to retirement income you receive while living in Colorado, regardless of where the pension was earned or which state the plan is administered in.