A South Carolina 401(k) withdrawal tax bill starts with the same amount you report on your federal return: traditional (pre-tax) distributions are fully taxable as ordinary income at the state level, with a top marginal rate of 6% for the 2025 tax year. Two stacking deductions soften the hit. Once you turn 65, you can shelter at least $15,000 of income through a retirement income deduction of up to $10,000 and a separate age-65 deduction that fills in the rest. Under 65, the retirement income deduction is capped at $3,000.
How the Withdrawal Is Taxed
South Carolina begins with your federal taxable income and applies its own modifications from there.1South Carolina Department of Revenue. Individual Income Tax A traditional 401(k) distribution funded with pre-tax contributions flows straight onto your South Carolina return as taxable income. There is no blanket retirement income exemption, but the deductions below are generous enough that many retirees owe little.
South Carolina does not add its own early withdrawal penalty. If you pull money out before age 59½, you still owe the federal 10% penalty and regular income tax, but the state does not tack on an additional surcharge.
The Retirement Income Deduction
Under South Carolina Code Section 12-6-1170(A), qualified retirement income (including 401(k) distributions, IRA withdrawals, and pension payments) is deductible up to an age-based cap:
- Under age 65: up to $3,000 per year.
- Age 65 or older: up to $10,000 per year.2South Carolina Department of Revenue. Income Tax – Age 65 and Older Deduction, General and Military Retirement Deductions, and Earned Income Offset
The cap is the ceiling on total qualified retirement income from all sources combined, not per account. If you draw $8,000 from a 401(k) and $12,000 from a pension after turning 65, only $10,000 of that $20,000 combined is deductible under this provision.
The Age 65 and Older Deduction
Once you turn 65, Section 12-6-1170(B) adds a second deduction of up to $15,000 that applies to any South Carolina income, not just retirement distributions.3South Carolina Department of Revenue. SC Revenue Ruling #21-13 – Age 65 and Older Deduction, Retirement Deductions, and Earned Income Offset Wages, investment earnings, rental income, and retirement distributions all qualify.
The two deductions are linked. Any amount claimed under the retirement income deduction reduces the $15,000 age-65 deduction dollar for dollar. Claim $10,000 in retirement income deduction and the age-65 deduction drops to $5,000, for a combined $15,000. Claim $3,000 because that is all the retirement income you had, and the age-65 deduction is $12,000, again totaling $15,000.4South Carolina Department of Revenue. Retirees – Lower Your Individual Income Tax Bill With These Five Tips
A single filer age 65 or older can shelter at least $15,000 through the combination. Married couples filing jointly where both spouses are 65 or older can combine their deductions for up to $30,000 in total shelter.
Making the Two Deductions Work Together
Claim the retirement income deduction first against your 401(k) income, then let the age-65 deduction cover the rest. You do not gain extra deduction dollars either way, but this order ensures the retirement piece is applied to income that qualifies for it, and the age-65 deduction picks up whatever is left.
Roth 401(k) Withdrawals
Roth 401(k) distributions are treated differently because contributions were made with after-tax dollars. A qualified distribution (the account has been open at least five years, and you are 59½ or older, disabled, or deceased) is excluded from gross income at both the federal and state level. Contributions and earnings come out tax-free.5Internal Revenue Service. Retirement Topics – Designated Roth Account
A non-qualified Roth withdrawal is not fully tax-free. The earnings portion is taxable as ordinary income on both your federal and South Carolina returns; the contribution portion still comes out untaxed because you already paid tax on it.
Military Retirement Pay Is Separate
If part of your retirement income is military retirement pay, that portion is completely exempt from South Carolina income tax with no age requirement, and this has been the rule for tax years after 2021.6South Carolina Department Of Veterans’ Affairs. Claiming Military Retiree State Income Tax Exemption In SC The exemption does not count against your $3,000 or $10,000 retirement income deduction, so 401(k) income can still take the deduction separately.
South Carolina Tax Rates for 2025 and 2026
After deductions, remaining taxable income runs through South Carolina’s progressive brackets. The top marginal rate for 2025 was 6%, down from 6.2% in 2024.1South Carolina Department of Revenue. Individual Income Tax The same rate structure applies regardless of filing status.
The top rate only kicks in above a threshold. For 2024, South Carolina taxable income over roughly $17,000 (after all deductions) hit the 6.2% top rate, while lower amounts were taxed from 0% to 5%.7South Carolina Department of Revenue. 2024 South Carolina Individual Income Tax Tables The bottom bracket is 0%, so the first slice of taxable income owes nothing. The effective rate on a 401(k) distribution therefore always sits below the top marginal rate.
For the 2026 tax year, the legislature enrolled H.4216, a bill that would collapse the brackets to two: 1.99% on the first $30,000 of taxable income and 5.21% on amounts above $30,000.8South Carolina Legislature. 2025-2026 Bill 4216 – Income Tax As of early 2026 it had passed both chambers but was awaiting the governor’s signature. The bill would also replace the federal standard deduction with a new South Carolina Income Adjusted Deduction of $15,000 for single filers and $30,000 for joint filers. Confirm the finalized 2026 figures on the Department of Revenue website before filing.
Withholding and Estimated Payments
Any taxable 401(k) distribution that qualifies as an eligible rollover distribution is subject to mandatory 20% federal income tax withholding, even if you plan to roll it over later.9Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules South Carolina withholding is separate. Many plan administrators can withhold state tax on request. If yours does not, or withholds less than your actual liability, you have to make up the difference.
If you expect to owe $100 or more in South Carolina income tax after withholding and credits, you are required to make quarterly estimated payments using Form SC 1040ES.10South Carolina Legislature. South Carolina Code 12-6-3910 – Estimated Tax Payments Form, Due Dates, Treatment of Excess Where Estimated Payments or Withholdings More Than Tax Liability, Waiver of Penalties This catches retirees who take a large lump-sum distribution without setting up state withholding. Payments are due April 15, June 15, September 15, and January 15 of the following year. Missing a deadline triggers underpayment interest. The rate was 7% for the first quarter of 2026, dropping to 6% starting April 1, 2026.11South Carolina Department of Revenue. SC Information Letter #26-9 – Interest Rate The cleanest fix is to ask your 401(k) plan administrator to withhold South Carolina tax directly from each distribution.
A Worked Example
Take a 67-year-old single filer who withdraws $40,000 from a traditional 401(k) in 2025:
- Distribution flowing to the SC return: $40,000
- Retirement income deduction (age 65+): −$10,000
- Age 65 deduction ($15,000 minus $10,000 already claimed): −$5,000
- Remaining SC taxable income before other deductions: $25,000
That $25,000 runs through the progressive brackets. Even hitting the 2025 top rate of 6% at the upper end, the state tax on a $40,000 withdrawal comes in well under $1,500, and lower still with other deductions. Applying a flat 6% to the full $40,000 without the deductions would produce $2,400. The gap is what the retirement deductions are worth on a mid-sized withdrawal, and skipping them is the most common expensive mistake on a South Carolina retiree’s return.