Maryland State Tax on 401(k) Withdrawals: Rates and Exclusions

The Maryland state tax on 401(k) withdrawals treats the money as ordinary income, applying a state rate between 2% and 6.50% plus a mandatory county income tax between 2.25% and 3.30%. Most retirees taking modest annual distributions end up with a combined state-and-county rate in the 7% to 8% range. If you’re 65 or older, totally disabled, or a retired federal, state, or local ranger age 55 or older, Maryland’s pension exclusion can shelter a substantial portion of that income, though any Social Security you collect reduces the exclusion dollar for dollar.¹

How the Withdrawal Is Taxed

Money you pull from a traditional 401(k) is ordinary income at both the federal and Maryland level, just like wages.² Maryland begins with your federal adjusted gross income and applies its own bracket schedule plus a county surcharge to that base. A large one-time withdrawal can push you into a higher bracket for the year, so the size and timing of your distributions matter.

Roth 401(k) money is different. If the account has been open at least five years and you’re 59½ or older (or disabled, or receiving it as a beneficiary), both contributions and earnings come out free of federal and Maryland tax.³

State Rates and the County Surcharge

Maryland’s state income tax runs through eight brackets. For 2026, single filers pay 4.75% on income between $3,001 and $100,000, which is where most retirees taking regular distributions will land. The rate climbs to 5.00% at $100,001, 5.25% at $125,001, 5.50% at $150,001, and 5.75% at $250,001. Above $500,000 single-filer income the rate is 6.25%, and above $1,000,000 it’s 6.50%. Joint filers, heads of household, and qualifying surviving spouses use the same rates with wider thresholds.⁴⁵

Every resident also owes a county income tax on the same taxable income base.⁶ For 2026, most jurisdictions sit at 3.20%, including Baltimore City, Baltimore County, Montgomery County, Prince George’s County, and Howard County. Dorchester and Kent counties are at the statutory ceiling of 3.30%. Worcester County is at the floor of 2.25%.⁷

Putting the two together shows the real cost. A Baltimore County retiree in the 4.75% state bracket pays 7.95% on a 401(k) distribution. The same retiree in Worcester County pays 7.00%. At the very top of the income scale, a taxpayer over $1,000,000 living in Dorchester County faces a combined marginal rate of 9.80%.

What Gets Withheld from Your Check

How much Maryland tax comes off the top depends on whether you take a lump sum or periodic payments. The distinction is significant.

Lump-Sum and Rollover-Eligible Distributions

If your withdrawal is an eligible rollover distribution (essentially any lump-sum or partial withdrawal that could have been rolled into another retirement account but wasn’t), the plan administrator must withhold Maryland tax at a flat 7.75%.⁸ That withholding is mandatory whenever the distribution is also subject to the 20% federal mandatory withholding. On a $50,000 lump-sum, expect $10,000 held for federal tax and $3,875 held for Maryland, leaving roughly $36,125 before any early withdrawal penalty.

Periodic and Annuity-Style Payments

For monthly, quarterly, or other scheduled payments, Maryland does not automatically withhold state tax. You have to ask for it by filing Form MW507P with your plan administrator and specifying a dollar amount.⁹ Skip that step and nothing gets withheld, meaning you’ll owe the full state and county tax when you file. That surprise bill is easy to avoid by setting up withholding at the start.

The Pension Exclusion

The pension exclusion is the largest state-level break available on 401(k) income, but the eligibility rules are narrow and the interaction with Social Security catches many retirees off guard.

Who Qualifies

On the last day of the tax year, you must meet at least one of these conditions:¹

Age 65 or older
Totally disabled, or your spouse is totally disabled
Age 55 or older and a retired forest ranger, park ranger, or wildlife ranger of a federal, state, or local agency

If none of these applies, the exclusion is not available regardless of how much 401(k) income you have.

What Income Counts

Only distributions from an “employee retirement system” qualify, meaning plans under Internal Revenue Code sections 401(a), 403, or 457(b). A 401(k) counts because it’s structured under section 401(a).¹

Here’s the trap: traditional IRAs, Roth IRAs, rollover IRAs, SEP plans, and Keogh plans are specifically excluded.¹⁰ If you rolled your 401(k) into a traditional IRA before starting withdrawals, those IRA distributions no longer qualify for the exclusion. A common retirement-planning move can quietly cost you this benefit.

The Social Security Offset

The maximum exclusion is indexed each year to the highest annual Social Security benefit payable to a worker retiring at 65 the prior year. For the 2025 tax year, the cap was $41,200.¹¹ The 2026 amount typically increases modestly and is posted on the Comptroller’s website.

The exclusion isn’t a flat deduction. Maryland reduces your maximum dollar for dollar by any Social Security or Railroad Retirement benefits you received during the year.¹ Social Security is already exempt from Maryland tax, so the state’s logic is that it counts toward your retirement-income shelter first.

Using the 2025 numbers: if you received $28,000 in Social Security, your available exclusion drops to $13,200. If your Social Security equals or exceeds $41,200, your pension exclusion is zero and the entire 401(k) distribution is taxable at the state and county level. The math runs through the Pension Exclusion Computation Worksheet (Worksheet 13A) filed with Maryland Form 502.¹¹ Your final exclusion is the lesser of your actual qualifying pension income or the reduced maximum.

Separate Subtractions for Military and Public Safety Retirees

Two other subtraction modifications operate independently of the general pension exclusion.

Retired military personnel can subtract up to $12,500 of military retirement income if they’re under 55, or up to $20,000 if they’re 55 or older. Amounts claimed under this subtraction can’t also count toward the general pension exclusion.¹

Retired law enforcement officers, correctional officers, and fire, rescue, or emergency services personnel of a federal, state, or local Maryland agency who are 55 or older can subtract up to $15,000 of qualifying public safety retirement income.¹⁰ The same non-duplication rule applies.

Early Withdrawal Penalty

Pulling money before age 59½ triggers a 10% federal additional tax on the taxable portion of the distribution.¹² It’s reported on IRS Form 5329 and added to your regular tax.¹³ Exceptions include separating from your employer in or after the year you turn 55 (a 401(k)-specific rule), total disability, certain medical expenses, and qualified domestic relations orders.

Maryland imposes no separate penalty on early withdrawals. The state simply taxes the distribution as ordinary income at the applicable state and county rates.

Reporting and Estimated Payments

Your plan administrator issues Form 1099-R showing the gross amount, taxable amount, and any federal or state withholding. You carry that into Maryland Form 502, and attach Form 502R if you’re claiming the pension exclusion.¹⁴

If Maryland withholding was insufficient, you’ll need quarterly estimated payments to avoid an underpayment penalty. Estimated payments use Form PV, with the amount calculated on the Payment Voucher Worksheet.¹⁵ You generally avoid an underpayment penalty if the tax on income not subject to withholding stays under $500, or if your quarterly payments equal at least 90% of the current year’s tax or 110% of last year’s.

This becomes an issue most often with periodic distributions where no MW507P was filed. A year of monthly 401(k) installments with zero Maryland withholding can produce a four-figure April bill plus interest. Setting up voluntary withholding through the plan is almost always simpler than tracking estimated payments through the year.

1
Maryland General Assembly. Maryland Code GTG 10-209 – Pension Exclusion
2
Internal Revenue Service. Roth Comparison Chart
3
Internal Revenue Service. Roth Account in Your Retirement Plan
4
Maryland Comptroller. 2026 Maryland State and Local Income Tax Withholding Information
5
Comptroller of Maryland. Tax Computation Worksheet Schedules I and II
6
Maryland General Assembly. Maryland Code GTG 10-106 – County Income Tax
7
Maryland Department of Legislative Services. 2026 Local Tax Rates
8
Comptroller of Maryland. Withholding Tax Facts 2026
9
Comptroller of Maryland. Administrative Release No. 41
10
Maryland Comptroller. Technical Bulletin 51 – Senior Citizens and MD Income Tax
11
Maryland Comptroller. 2025 Pension Exclusion Computation Worksheet 13A
12
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
13
Internal Revenue Service. Form 5329 – Additional Taxes on Qualified Plans Including IRAs and Other Tax-Favored Accounts
14
Comptroller of Maryland. Maryland Form 502 Resident Income Tax Return
15
Comptroller of Maryland. 2025 Maryland Resident Tax Forms and Instructions