Does Colorado Tax Pensions? What You Need to Know

Colorado retirees often wonder how their pensions will be taxed at the state level. While some states fully exempt pension income, Colorado allows certain deductions instead. This impacts how much retirees owe in state taxes each year.

Understanding these tax rules is important for financial planning. Within Colorado, taxation varies based on factors such as age, residency status, and type of pension received.

How Pensions Are Taxed by the State

Colorado taxes pension income under its state income tax system, applying a flat rate of 4.40% in 2024. Unlike states that fully exempt retirement benefits, Colorado includes pension distributions in taxable income but offers deductions based on age. Retirees under 65 receive a smaller tax break, while those 65 and older can exclude a larger portion from taxation.

The state follows federal guidelines in determining taxable pension income, meaning the amount reported on a federal return typically carries over to the Colorado return. However, Colorado does not impose additional taxes beyond its standard rate.

Taxation also depends on how pension payments are structured. Lump-sum distributions may be taxed differently than periodic payments. If a retiree rolls over a lump sum into a qualified retirement account, such as an IRA, the amount is not immediately taxable. If taken as a cash distribution, it is subject to Colorado’s income tax in the year received.

Retirement Income Subtractions

Colorado allows retirees to reduce their taxable income through specific subtractions for retirement benefits, including pensions, Social Security, and withdrawals from retirement accounts. The amount a retiree can subtract depends on age.

For those between 55 and 64, up to $20,000 of eligible retirement income can be subtracted. Once a taxpayer reaches 65, this amount increases to $24,000. Eligible income includes pension payments, 401(k) distributions, IRAs, and annuities.

The subtraction is applied per taxpayer, meaning married couples filing jointly can each claim it if both receive qualifying retirement income. Any amount exceeding the subtraction limit remains taxable.

Public Versus Private Pension Plans

Colorado taxes public and private pensions the same way, though differences in structure affect overall tax liability. Public pensions, such as those from the Colorado Public Employees’ Retirement Association (PERA), typically provide guaranteed monthly payments based on years of service and salary history. Private pensions, often from corporate employers, may follow a similar model but are becoming less common as companies shift toward 401(k)-style plans.

Cost-of-living adjustments (COLAs) can impact taxation. Many public pensions, including PERA, provide automatic COLAs, increasing taxable income over time. Private pensions may not include COLAs, meaning retirees relying on them could see their purchasing power erode.

Another factor is how contributions were taxed before retirement. Public employees contributing to PERA do not pay Social Security taxes on those earnings, but their pension benefits are fully taxable at the federal level. Private-sector employees who paid into Social Security may receive a mix of taxable and nontaxable retirement income. While this does not change Colorado’s tax rules, it affects overall tax liability when considering both federal and state obligations.

Residency and Tax Responsibilities

Residency status determines Colorado income tax obligations for retirees receiving pensions. Full-year residents must report all sources of income, including pensions, regardless of where the payments originate.

Part-year residents owe taxes only on income earned or received while living in Colorado. If a retiree moves to or from the state during the year, pension distributions must be apportioned accordingly.

Nonresidents who receive pension income from a Colorado-based employer generally do not owe state taxes on those payments. Colorado follows federal guidelines, which dictate that pensions are taxed based on the recipient’s state of residence rather than the state where the pension was earned. Retirees who relocate to states without income taxes can avoid Colorado’s tax on their pension. However, those maintaining property or business interests in Colorado may still have tax filing requirements.

Distribution Variations

How pension distributions are received affects Colorado tax obligations. The state generally follows federal tax treatment, meaning the way a pension is distributed—whether as a lump sum, periodic payments, or a combination of both—determines when and how it is taxed.

Lump-sum distributions, often offered when leaving an employer or retiring, are fully taxable in the year received unless rolled over into a qualified retirement account. If taken as a direct cash payout, the entire amount is subject to Colorado’s 4.40% income tax, which could result in a higher overall tax bill. In contrast, periodic payments—such as monthly pension checks—spread the tax burden over multiple years, potentially keeping retirees in a lower tax bracket. Some pension plans allow for partial lump-sum withdrawals combined with ongoing payments, providing flexibility while managing tax exposure.

Required minimum distributions (RMDs) also play a role in taxation. For retirees aged 73 and older (as of 2024), federal law mandates withdrawals from tax-deferred retirement accounts, including certain pension plans. These RMDs are fully taxable at both the federal and state levels, and failing to take them can result in IRS penalties. While Colorado does not impose additional penalties for missed RMDs, retirees should ensure they withdraw the correct amounts to avoid unnecessary tax consequences.

Filing Requirements and Documentation

Retirees receiving pension income in Colorado must comply with state tax filing requirements, including reporting pension distributions and claiming applicable subtractions. Proper documentation is necessary to ensure accurate tax reporting.

Form 1099-R is the primary document used to report pension distributions, and retirees should receive this form from their pension provider each year. It details the total amount distributed, the taxable portion, and any federal or state tax withheld. When filing a Colorado state tax return, retirees must accurately transfer this information and apply the appropriate retirement income subtraction based on their age. If taxes were not withheld from pension payments, retirees may need to make estimated tax payments to avoid underpayment penalties.

Recordkeeping is also important in case of an audit or tax adjustments. Retirees should retain copies of their 1099-R forms, prior tax returns, and any correspondence related to pension income. If a pension includes after-tax contributions, retirees should maintain documentation showing the portion not subject to further taxation. Keeping thorough records helps ensure compliance with Colorado tax laws and simplifies the filing process.