Does Montana Tax Pensions and Retirement Income?

Yes, Montana does tax pensions and retirement income. Distributions from 401(k)s, traditional IRAs, private pensions, public employee pensions, and federal government pensions all count as ordinary taxable income on your Montana return. Social Security is partially taxable using the federal formula. A handful of carve-outs soften the hit: a $5,500 subtraction once you turn 65, a conditional exemption for military retirees, and a full exemption for railroad retirement benefits.

What Montana Taxes

Montana’s income tax starts with your federal taxable income, then applies state-specific subtractions. Almost every common retirement payment flows through that calculation as taxable:

Private pensions and distributions from 401(k), 403(b), and 457 plans.
Traditional IRA withdrawals, including required minimum distributions.
Public employee pensions from state, county, municipal, and school district systems.
Federal pensions, including the Civil Service Retirement System and the Federal Employees Retirement System.

It does not matter where you earned the pension. If you worked in another state and retired to Montana, Montana taxes the payments once you are a resident. The reverse also holds, and that’s covered at the end.

Lump-sum distributions do not get special treatment at the state level. The full taxable amount lands in a single year and can push you into Montana’s top bracket. Federal law requires 20% federal withholding on qualified-plan lump sums, but Montana withholding isn’t automatic, so you may need to arrange it yourself or make an estimated payment.¹

What’s Exempt or Tax-Free

Three categories of retirement income escape some or all of Montana’s tax.

Railroad retirement. Federal law prohibits states from taxing railroad retirement annuities, Tier 1 and Tier 2 alike.² You don’t claim a deduction; the income simply doesn’t appear on your state return.

Qualified Roth IRA distributions. Because Montana begins with federal taxable income, qualified Roth withdrawals — those taken after age 59½ and at least five years after your first contribution — are tax-free in Montana too. Early or non-qualified Roth withdrawals that show up as federally taxable carry over as taxable here.

Military retirement, with a condition. See the dedicated section below. The exemption is real but it requires Montana wage income to use.

The $5,500 Age-65 Subtraction

Once you turn 65, Montana lets you subtract $5,500 from your federal taxable income on your state return. On a joint return where both spouses are 65 or older, the subtraction doubles to $11,000.³ The amount has been indexed for inflation since tax year 2025, so check the Department of Revenue’s current tables for the exact 2026 figure.

The subtraction isn’t limited to pension income. It reduces your Montana taxable income regardless of the source, so retirees with a mix of pension payments, investment income, and part-time wages all benefit. There is no income phase-out.

Separately, your federal taxable income already carries any federal senior deduction you claim. For 2025 through 2028, taxpayers 65 and older can claim an additional $6,000 federal deduction ($12,000 if both spouses on a joint return qualify), phasing out above $75,000 of modified AGI ($150,000 joint).⁴ Because Montana starts from the federal number, that deduction flows through automatically.

How Montana Taxes Social Security

Montana is one of a small group of states that still tax Social Security benefits, and it uses the same formula the IRS does. The figure that drives it is your “combined income”: adjusted gross income plus nontaxable interest plus half your Social Security benefits.⁵

Single filers with combined income under $25,000 (joint under $32,000): none of your benefits are taxable.
Single filers between $25,000 and $34,000 (joint between $32,000 and $44,000): up to 50% of benefits are taxable.
Single filers above $34,000 (joint above $44,000): up to 85% of benefits are taxable.

Whatever portion is taxable federally is also taxable in Montana. Retirees whose only income is Social Security often clear the first threshold and owe nothing. Add a pension, an IRA withdrawal, or dividends, and combined income rises fast, dragging more of the benefit into the taxable range.

Military Retirement: The Working Exemption

Montana’s military retirement exemption is generous but conditional. Qualifying retirees can subtract from Montana taxable income the lesser of their Montana-source wage income (from a job, self-employment, or farming in Montana) or 50% of their military pension, for up to five consecutive years.⁶

That wage-income floor is the catch. If you are fully retired and earn nothing in Montana, the exemption is zero. The program’s official name, Working Military Retirement Exemption, makes this explicit, but it still catches people out.⁷

Beneficiaries receiving military survivor benefits can exempt up to 50% of those payments without the wage-income requirement. To qualify for either version, you must have been a Montana resident before receiving the pension, or have become a resident after June 30, 2023. The five-year clock starts once you meet the eligibility rules. For residents who qualified before that cutoff, the exemption runs through tax year 2028, and the whole provision sunsets on December 31, 2033.⁶

Montana Tax Rates for 2026

Montana uses a two-bracket system. For tax year 2026, HB 337 lowered the top rate to 5.65% and widened the brackets:⁸

Single or married filing separately: 4.7% on the first $47,500; 5.65% above that.
Head of household: 4.7% on the first $71,250; 5.65% above.
Married filing jointly: 4.7% on the first $95,000; 5.65% above.

In 2025, the top rate was 5.9% and it kicked in at $21,100 single or $42,200 joint.⁹ Most retirees with moderate pension income will see a lower effective rate in 2026 than in recent years.

Withholding and Estimated Payments

This is where retirees without employer paychecks tend to stumble. If pensions, IRA distributions, or Social Security payments reach you without enough tax withheld, Montana expects quarterly estimated payments. To avoid an underpayment penalty, your combined withholding and estimated payments must equal at least 90% of this year’s tax or 100% of last year’s.¹⁰

Two situations waive the requirement:

Small balance. If your total tax after credits and withholding is less than $500, no estimated payments are required.
Recent retirees. If you retired during the current tax year after reaching age 62, or became disabled during the year, estimated payments aren’t required for that year or the next.¹⁰

The cleanest fix is to ask your pension administrator or IRA custodian to withhold Montana tax from each payment. Most providers let you set federal and state withholding on the same form. Getting it right the first year of retirement spares you a bill the following April.

If You Leave Montana

Montana cannot tax your pension once you move away. Federal law bars states from taxing retirement income paid to former residents, covering qualified retirement plans, IRAs, government pensions, and deferred compensation.¹¹ Your new state of residence gets to tax those payments. If you keep Montana-source income from rental property, a business, or freelance work, Montana can still tax that on a nonresident return, but the pension itself is off the table.

1
Internal Revenue Service. Topic No. 412, Lump-Sum Distributions
2
Office of the Law Revision Counsel. 45 USC 231m – Assignability; Exemption From Levy
3
Montana Department of Revenue. Montana Tax Simplification Resource Hub
4
Internal Revenue Service. Check Your Eligibility for the New Enhanced Deduction for Seniors
5
Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable
6
Montana State Legislature. Montana Code 15-30-2120 – Adjustments to Federal Taxable Income
7
Montana Department of Revenue. Working Military Retirement Exemption
8
Montana Department of Revenue. HB337: 2026-2027 Montana Individual Income Tax Changes
9
Montana Department of Revenue. 2025 Montana Tax Tables and Deductions
10
Montana State Legislature. Montana Code 15-30-2512 – Estimated Tax, Payment, Exceptions, Interest
11
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income