Yes, Colorado does tax 401(k) withdrawals, but for most retirees the actual bill is small or zero. Traditional 401(k) distributions are taxed at Colorado’s flat 4.40% income tax rate, and a pension and annuity subtraction then removes a large portion of that income before the rate applies. Starting with the 2026 tax year, Senate Bill 25-136 eliminates the dollar caps and age restrictions on that subtraction, which means most 401(k) distributions will owe no Colorado income tax at all.
How Colorado Taxes Retirement Income
Colorado uses a single flat rate on all taxable income instead of graduated brackets. Under CRS 39-22-104, that rate is 4.40% for tax years beginning on or after January 1, 2022.1Justia Law. Colorado Revised Statutes Title 39 – Section 39-22-104 Your Colorado return starts with your federal taxable income, then adds and subtracts Colorado-specific items. Because a traditional 401(k) withdrawal shows up in federal taxable income, it also flows onto your Colorado return unless a subtraction removes it.
So the real question is not whether Colorado taxes 401(k) money — it does, in principle — but how much of it survives the pension and annuity subtraction.
The Pension and Annuity Subtraction
Colorado’s pension and annuity subtraction lets you remove qualifying retirement income from your state taxable income before the 4.40% rate is applied. Traditional 401(k) distributions are explicitly listed as qualifying income, along with pensions, annuities, and other distributions from employer-sponsored retirement plans.2Legal Information Institute. Colorado Code 39-22-104(4)(f) – Pension and Annuity Subtraction
Caps That Applied Through the 2025 Tax Year
For tax years through 2025, the subtraction amount depends on your age at the end of the year:3Colorado Department of Revenue – Taxation. Information for Retirees
- Age 55 to 64: up to $20,000 of qualifying retirement income.
- Age 65 and older: up to $24,000.
- Under 55: no subtraction, unless you are receiving benefits as a survivor (such as a widowed spouse or orphan child) of the person who originally earned the pension.
Married couples filing jointly each claim their own subtraction based on their own age and their own retirement income. A 66-year-old and a 60-year-old filing together could subtract up to $44,000 combined if both had enough qualifying income to use the full amounts.
What Changes in 2026 Under SB25-136
The Colorado General Assembly passed SB25-136, which eliminates all dollar caps on the pension and annuity subtraction for income tax years starting on or after January 1, 2026. Any individual, at any age and any income level, may subtract the full amount of pension and annuity income included in their federal taxable income.4Colorado General Assembly. SB25-136 Expand Deduction for Retirement Benefits A $60,000 traditional 401(k) distribution taken in 2026 could be subtracted in full, bringing the Colorado tax on it to zero. Under the 2025 rules, that same distribution taken by someone under 55 would have produced roughly $2,640 in Colorado tax.
Confirm the bill’s implementation status and any filing instructions with the Colorado Department of Revenue before you file for 2026.
Roth 401(k) Withdrawals
Qualified Roth 401(k) distributions are not included in your federal adjusted gross income, because the contributions were taxed in the year they were made. Since Colorado builds its tax on federal taxable income, a qualified Roth distribution never enters the state calculation at all. A distribution is qualified if the account has been open at least five years and you are at least 59½, disabled, or the money goes to a beneficiary after your death. The earnings portion of a non-qualified Roth distribution does appear in federal taxable income and is treated the same as traditional 401(k) money on your Colorado return.
Rollovers
Rolling a 401(k) directly into an IRA or another employer plan is not a taxable event, federally or in Colorado. A direct rollover does not appear as taxable income on your federal return, so nothing flows onto your Colorado return. On a 1099-R, a direct rollover usually carries distribution code G or H in box 7. If the plan sends you a check instead and you redeposit the money into an IRA within 60 days, the plan will generally withhold 20% for federal taxes, and you have to replace that 20% from other funds to complete a full rollover.
Early Withdrawals Before Age 59½
Taking money from a 401(k) before age 59½ triggers a 10% federal early withdrawal penalty on top of regular federal income tax, unless you qualify for an exception such as disability, substantially equal periodic payments, or separation from service after age 55.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Colorado itself does not impose a separate early withdrawal penalty. The distribution is simply taxed at the 4.40% flat rate like any other income. Under prior law, the real state-level cost of an early withdrawal was being locked out of the pension and annuity subtraction: anyone under 55 could not subtract any of the distribution, so the full amount sat on their Colorado return. SB25-136 removes that age restriction for 2026, which means an early distribution can also be subtracted in full from Colorado taxable income.4Colorado General Assembly. SB25-136 Expand Deduction for Retirement Benefits The federal 10% penalty and federal income tax still apply.
Estimated Tax Payments Catch Retirees Off Guard
Unlike wages, 401(k) distributions do not automatically have Colorado state tax withheld. If your plan administrator withholds only federal tax, and you expect to owe more than $1,000 in net Colorado tax after credits, you are required to make quarterly estimated payments.6Colorado Department of Revenue. Individual Estimated Income Tax Instructions
For the 2026 tax year, the quarterly deadlines are April 15, June 15, September 15, and January 15, 2027. To avoid an underpayment penalty, your total payments through the year need to hit the smallest of:6Colorado Department of Revenue. Individual Estimated Income Tax Instructions
- 70% of your actual 2026 net Colorado tax liability.
- 100% of your 2025 net Colorado tax liability, if your federal AGI was $150,000 or less ($75,000 if married filing separately).
- 110% of your 2025 net Colorado tax liability, if your AGI exceeded those thresholds.
Some 401(k) custodians will withhold Colorado state tax on request. Ask your plan administrator directly. If they cannot, quarterly estimates are the only way to stay current.
Filing Your Colorado Return
Your plan custodian sends a Form 1099-R showing the gross distribution and the taxable portion. Those numbers carry over to the Colorado Individual Income Tax Return (Form DR 0104). To claim the pension and annuity subtraction, complete the Subtractions from Income Schedule (Form DR 0104AD) and enter the eligible amount.7Colorado Department of Revenue. DR 0104 – Colorado Individual Income Tax Return
Watch the distribution code in box 7 of the 1099-R. Code 7 marks a normal distribution, code 2 means an early distribution with an exception, and code 1 flags an early distribution with no exception and the 10% federal penalty. The code drives how both the IRS and Colorado treat the withdrawal, so an error there can cost you the exception or the subtraction.
If you moved into or out of Colorado during the year, you file as a part-year resident and only pay Colorado tax on income received while a resident plus Colorado-source income during the nonresident portion. A 401(k) distribution received in March while you lived in Texas is not Colorado income even if you moved to Denver in June. Part-year filers complete Form 104PN alongside the regular return.8Department of Revenue – Taxation. Income Tax Topics: Part-Year Residents and Nonresidents
You can file electronically through the Department of Revenue’s Revenue Online portal or mail a paper return. The portal handles payments if you owe additional tax.