Michigan taxes 401(k) withdrawals at the state’s flat 4.25% income tax rate, on top of the federal income tax you already owe. A 2023 law is phasing in a retirement income subtraction that reaches 100% of eligible retirement income for the 2026 tax year, and for many retirees it wipes out the Michigan state tax on 401(k) withdrawals entirely. How much of that relief you actually get depends on your birth year, your age when you withdraw, and whether the new subtraction beats the older tier-based rules.
Which Birth-Year Tier You Fall Into
Michigan sorts retirees into three tiers by birth year, and the tier controls what you can subtract from state taxable income before that 4.25% applies.
Born Before 1946
Public retirement income (government pensions, Social Security) is fully subtracted with no cap. Private retirement income, including 401(k) distributions, is deductible up to an inflation-adjusted maximum. For the 2025 tax year the cap was $65,897 for single filers and $131,794 for joint filers, with a slightly higher figure for 2026 after the annual adjustment.1State of Michigan. Revenue Administrative Bulletin 2026-1 Any public retirement subtraction you claim reduces the private cap dollar for dollar. The 2023 reform does not change these rules.
Born 1946 Through 1952
Historically, you could subtract a flat $20,000 as a single filer or $40,000 filing jointly against all income types.2Michigan House Fiscal Agency. Tax Three Tiered Treatment of Retirement Income Starting with the 2023 tax year, the new phase-in subtraction often gives you a bigger deduction, and Michigan lets you claim whichever is larger.
Born After 1952
Under the old rules, you cannot subtract any retirement income from Michigan tax until you turn 67, except for Social Security. Once you reach 67, you had a choice between the same $20,000/$40,000 deduction available to the 1946–1952 group or continuing to exempt Social Security and claim personal exemptions.2Michigan House Fiscal Agency. Tax Three Tiered Treatment of Retirement Income The 2023 phase-in changes this calculation significantly, and Public Act 24 of 2025 adds a further option for tax years 2026 through 2028.
The 2023 Phase-In Retirement Subtraction
Public Act 4 of 2023 created a new retirement income subtraction that phases up over four tax years, reaching 100% of eligible retirement income for the 2026 tax year.3State of Michigan. Retirement and Pension Benefits For most retirees born in 1946 or later, it is far more generous than the flat $20,000/$40,000 deduction, and by 2026 many will owe zero Michigan income tax on their 401(k) distributions.
The new subtraction does not automatically replace the old tier rules. Michigan makes you calculate your deduction under both approaches and claim whichever produces the larger tax break. You do this comparison on Worksheet 2 (for the Michigan Standard Deduction) and the relevant section of Form 4884, the Pension Schedule.4State of Michigan. Form 4884 Instructions – Pension Schedule If the standard deduction gives you a bigger break, you skip Form 4884 entirely.
Retirees born before 1946 stay on their existing rules and are not affected by Public Act 4.1State of Michigan. Revenue Administrative Bulletin 2026-1 Public Act 24 of 2025 adds another wrinkle for taxpayers born after 1952 who are 67 or older: for tax years 2026 through 2028, they can claim both the standard deduction and the Social Security deduction, which may reduce state tax further.3State of Michigan. Retirement and Pension Benefits
The practical takeaway: if you are under 67 and born after 1952, you still face the full 4.25% Michigan tax on 401(k) withdrawals with limited relief. Once you reach 67, the phase-in subtraction combined with the standard deduction can eliminate most or all of your Michigan tax on retirement income. Running the numbers on Form 4884 each year is worth the effort.
If You Withdraw Before Age 59½
The state retirement subtraction does not rescue you from an early withdrawal. Pulling money from a 401(k) before 59½ triggers a 10% federal additional tax on top of the ordinary federal income tax, and Michigan’s 4.25% still applies to the full distribution.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Michigan does not add its own penalty, but the federal income tax, the 10% federal penalty, and the state 4.25% together can consume a quarter or more of the withdrawal. On a $20,000 early distribution you could easily lose $5,000 or more before accounting for your federal bracket.
Several federal exceptions eliminate the 10% penalty, though the distribution is still taxable at both levels:
- Separation from service in or after the year you turn 55 (age 50 for qualifying state or local public safety employees), for distributions from that employer’s plan.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Total and permanent disability.
- Qualified birth or adoption distributions, up to $5,000 per child.
Hardship withdrawals let you access funds early if your plan allows them, but a hardship distribution does not avoid the 10% penalty on its own. It just opens the door to the money before a normal distributable event.6Internal Revenue Service. Retirement Topics – Hardship Distributions
Required Minimum Distributions Are Still Taxed
Starting at age 73, federal law requires you to begin withdrawing a minimum amount each year, and those required minimum distributions are ordinary income for both federal and Michigan purposes.7Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs If you are still working and do not own 5% or more of the business sponsoring the plan, you can delay RMDs from that employer’s 401(k) until the year you actually retire.
Missing an RMD triggers a 25% federal excise tax on the shortfall. Correcting the mistake within two years drops that to 10%.8Internal Revenue Service. Notice 2024-35 – Certain Required Minimum Distributions Older guidance citing a 50% penalty is outdated; SECURE 2.0 reduced it. For Michigan purposes, the RMD is retirement income and can be sheltered by the phase-in subtraction to the same extent as any other 401(k) distribution.
City Income Taxes Are a Separate Layer
Michigan’s 4.25% state rate is not the whole picture. Twenty-four Michigan cities levy their own local income taxes on top of state tax, including Detroit, Grand Rapids, Lansing, Flint, and Saginaw. Rates and exemptions vary. Detroit, for example, has historically exempted pension and annuity income from its city tax while still taxing pre-retirement distributions. The city exemptions are separate from the state retirement income subtraction, so check the rules for your specific city before assuming state-level relief carries over.
Controlling Michigan Withholding on Distributions
Your plan administrator will withhold Michigan income tax from each distribution unless you tell them otherwise. You control this with Form MI-W4P, Michigan’s withholding certificate for pension and annuity payments.9State of Michigan Department of Treasury. Withholding Certificate for Michigan Pension or Annuity Payments (MI W-4P)
On the form you can opt out of withholding entirely (useful if your retirement subtraction will zero out your state tax), specify a percentage, or set a fixed dollar amount per distribution. Opting out and then owing tax on your MI-1040 exposes you to a balance due plus possible penalties and interest. Retirees pulling from several pensions or accounts should look at quarterly estimated payments on Form MI-1040ES to avoid underwithholding, and you can update MI-W4P with your administrator whenever your situation changes.9State of Michigan Department of Treasury. Withholding Certificate for Michigan Pension or Annuity Payments (MI W-4P)
Ways to Shrink the Tax Bill
Even after the retirement subtraction reaches 100% in 2026, federal tax on 401(k) withdrawals still applies, and not every Michigan resident qualifies for the full state subtraction. A couple of approaches help on both sides of the return.
Timing withdrawals into lower-income years is the simplest move. If you retire at 62 but delay Social Security to 67 or 70, those early retirement years may fall in a lower federal bracket, and larger 401(k) distributions during that window lock in a lower federal rate. Michigan’s flat 4.25% doesn’t flex with income, but the state retirement subtraction may not fully apply before 67, so the federal and state pieces need to be weighed together.
Roth conversions are the other lever. Converting traditional 401(k) funds to a Roth IRA means paying income tax on the converted amount now, in exchange for tax-free withdrawals later once you satisfy the holding rules (the account has been open at least five years and you are 59½ or older).10Internal Revenue Service. Roth IRAs Converting in a low-income year, such as after you retire but before Social Security and RMDs start, minimizes the tax cost. Roth IRAs also have no lifetime RMDs, which gives you more control over taxable income in later years.