Basics of the Iowa Pension Exclusion

NOTE: I wrote this post in 2013, so be aware of its age. However, the facts are still accurate now, as the pension exclusion still exists in Iowa, with the same rules.

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If you’re an Iowan who takes money out of a retirement account, you may qualify for the “Iowa Pension Exclusion,” where a portion of your withdrawal will be tax-free in Iowa. Here are the basics.

1. The exclusion amount is $6,000 per person, or $12,000 for a married couple
2. To qualify, you must be: over age 55; or disabled; or a surviving spouse, son, daughter, or parent who receives a retirement account distribution from a deceased relative, if the deceased was over age 55 or disabled

Here are a few examples:

1. Single person, over age 55 receives a $10,000 withdrawal from an IRA. This person can exclude $6,000 of the withdrawal from taxation on their Iowa tax return.
2. Single person, over age 55, receives a $5,000 withdrawal from an IRA. This person can exclude the full $5,000 from taxation on their Iowa income.n
3. Married couple, both over age 55. One spouse receives $15,000 from an IRA, the other spouse has no retirement account withdrawals during the year. The spouse who took money from the IRA gets the full $12,000 exclusion.
4. If one spouse is over age 55 and one spouse is under age 55, only the spouse who is over age 55 can take the exclusion. For example: one spouse is 58 and the other is 54. The 58-year-old receives $10,000 of pension income, the 54-year-old receives $5,000 of pension income. The 58-year-old can take a $10,000 pension exclusion, but the 54-year-old gets no exclusion.

Pension income includes withdrawals from IRAs and 401(k) plans as well as retirement annuities (such as IPERS). It does not include Social Security.

For more information and examples, see the Iowa tax return “expanded instructions” available on the Iowa Department of Revenue website.