California does tax retirement income, and it taxes most of it as ordinary income at the same 1% to 13.3% rates that apply to wages. The one large carve-out is Social Security, which the state does not tax at all. Pensions, 401(k) withdrawals, traditional IRA distributions, and payments from CalPERS or CalSTRS are all fully taxable on your California return.
What California Does Not Tax
Social Security retirement, survivor, and disability benefits are fully exempt from California income tax, regardless of how much of the benefit is taxable on your federal return and regardless of your total income.1California Tax Service Center. Special Circumstances The exemption comes from California Revenue and Taxation Code Section 17087, which makes the federal rules for taxing Social Security inapplicable at the state level.2California Legislative Information. California Revenue and Taxation Code 17087
The same statute exempts both Tier 1 and Tier 2 Railroad Retirement benefits. California’s treatment is broader than the federal rule, which only gives favorable tax treatment to the Social Security equivalent portion of Tier 1 and taxes Tier 2 like a private pension.3Franchise Tax Board. FTB Pub. 1001 – Supplemental Guidelines to California Adjustments On your California return, you subtract these benefit amounts from your federal adjusted gross income.
Qualified Roth IRA distributions are also tax-free in California, mirroring the federal treatment. To qualify, the account must have been open at least five years, and you must be at least 59½, disabled, or taking the funds as a beneficiary after the owner’s death. If a Roth distribution does not meet those conditions, the earnings portion is taxable as ordinary income for both federal and California purposes.
Department of Veterans Affairs disability compensation is a separate category and is fully exempt from both federal and California income tax.4Internal Revenue Service. Veterans Tax Information and Services VA disability payments do not need to appear on your state return.
What California Taxes as Ordinary Income
Everything else in a typical retirement income picture is taxable. That includes distributions from:
- The California Public Employees’ Retirement System (CalPERS)
- The State Teachers’ Retirement System (CalSTRS)
- Private employer pensions
- 401(k) plans
- 403(b) annuities
- Traditional IRAs and SEP IRAs
- 457 plans
When you draw from any of these, the distribution is added to your other income for the year and taxed at your marginal rate. California generally follows federal rules on how and when distributions are reported, so the taxable amount from your federal return flows through to the state return, where you make any California-specific adjustments on Schedule CA.
A pension earned in another state becomes taxable once you move to California. The Franchise Tax Board treats all income received while you are a California resident as taxable, regardless of where the employer was located.5Franchise Tax Board. FTB Pub. 1100 – Taxation of Nonresidents and Individuals Who Change Residency So a Florida employer pension you were drawing before the move becomes California taxable from the date you establish residency.
Military Retirement Pay
Military retirement pay is taxed as ordinary income for California residents, regardless of where you were stationed on active duty.6Franchise Tax Board. Military Starting with the 2025 tax year, though, qualifying military retirees can exclude up to $20,000 of federal military retirement pay or Defense Department Survivor Benefit Plan annuity payments from gross income. The exclusion applies to tax years beginning on or after January 1, 2025, and before January 1, 2030. Any retirement pay above the $20,000 threshold is taxed at regular rates.
The California Tax Rates That Apply
Retirement income flows through the same progressive bracket system as wages. For the 2025 tax year, single filers start at 1% on the first $11,079 of taxable income and climb through several brackets to a top regular rate of 12.3% on income above $742,953.7Franchise Tax Board. 2025 California Tax Rate Schedules A 1% Mental Health Services Tax applies to taxable income above $1 million, bringing the effective top rate to 13.3%.
Because all taxable income stacks on the same return, a large pension payment or 401(k) withdrawal can push part-time wages, interest, or dividends into a higher bracket. A retiree with $60,000 from CalPERS and $25,000 from a 401(k) has those amounts added to anything else on the return to determine the marginal rate on each additional dollar.
Early Withdrawals and the Age-73 Rules
Taking money out of a retirement account before age 59½ triggers penalties at both levels. The federal government adds a 10% tax on the early distribution, and California layers on its own 2.5%.8Franchise Tax Board. Early Distributions That is 12.5% in penalties before you even get to regular income tax on the money. SIMPLE IRA plans carry heavier penalties in the first two years of participation: 25% federal and 6% state.
Several federal exceptions can eliminate the 10%, including separation from service at age 55 or later, substantially equal periodic payments, total and permanent disability, unreimbursed medical expenses above 7.5% of adjusted gross income, qualified birth or adoption expenses up to $5,000 per child, and distributions required by an IRS levy.9Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions California generally follows the same exceptions for its 2.5% penalty.
At the other end of the timeline, federal law requires you to begin taking minimum distributions from most retirement accounts once you reach age 73.10Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) Roth IRAs are exempt during the owner’s lifetime. Your first required minimum distribution is due by April 1 of the year after you turn 73, and every subsequent RMD is due by December 31. If you are still working and have a 401(k) with your current employer, you can delay RMDs from that plan until you actually retire.
Each RMD counts as ordinary income on your California return. Missing one triggers a 25% federal excise tax on the amount you should have withdrawn, dropping to 10% if corrected within two years. California does not add its own penalty for a missed RMD, but once the catch-up distribution is taken, it adds to that year’s California taxable income. Because RMDs can push a retiree into a higher bracket, some people start withdrawals earlier, spread Roth conversions across multiple years, or use qualified charitable distributions directly from an IRA to lower the taxable amount.
Paying the Tax: Withholding and Estimated Payments
If your retirement income does not have enough California tax withheld, you may owe quarterly estimated payments. The state requires them if you expect to owe at least $500 for the year ($250 if married filing separately) and your withholding and credits will cover less than 90% of the current year’s tax or 100% of the prior year’s tax.11Franchise Tax Board. Estimated Tax Payments
Pension administrators and plan custodians can withhold California tax from your distributions if you ask them to. When withholding is unavailable or too low, quarterly estimated payments due in April, June, September, and January keep you clear of underpayment penalties and interest.
Credits That Reduce the Bill for Older Filers
California offers a senior exemption credit under Revenue and Taxation Code Section 17054 for taxpayers aged 65 or older. For the 2025 tax year, the credit is $153 per qualifying individual, or $306 for a married couple where both spouses are 65 or older.12Franchise Tax Board. 2025 Instructions for Form 540 2EZ Personal Income Tax Booklet It adjusts for inflation annually and applies at any income level.
A narrower Senior Head of Household Credit is available to residents 65 or older who previously qualified as head of household, whose qualifying person died within the past two years, and whose income is less than $98,652. The maximum credit is $1,860.13Franchise Tax Board. Senior Head of Household Credit
If You Move Out of California
Once you establish residency in another state, federal law blocks California from taxing your retirement income as a nonresident. Under 4 U.S.C. Section 114, no state may tax the retirement income of a nonresident when it is paid from a qualified plan, IRA, 403(b), 457 plan, or government pension as substantially equal periodic payments over your life expectancy or a period of at least 10 years.14Office of the Law Revision Counsel. 4 US Code 114 – Limitation on State Income Taxation of Certain Pension Income Military retired pay is specifically included.
The protection depends on actually being a nonresident. California defines a resident as someone in the state for other than a temporary or transitory purpose, and the Franchise Tax Board looks closely at moves that appear built around tax avoidance.15Legal Information Institute. California Code of Regulations Title 18 Section 17014 – Who Are Residents and Nonresidents Keeping your California home, driver’s license, or voter registration while claiming residency in a no-tax state can leave you still on the hook here.