Yes, pensions are taxed in California. The state treats most retirement plan distributions as ordinary income and applies the same progressive rates it uses for wages, from 1% on the lowest bracket up to 13.3% once taxable income tops $1 million. A few kinds of retirement income escape the state’s reach: Social Security, Railroad Retirement, qualified Roth withdrawals, certain disability pensions, and, starting with the 2025 tax year, up to $20,000 of military retired pay for veterans who meet the income limits.
How California Taxes Pension Distributions
California generally follows federal tax treatment. Whatever portion of your pension is taxable on your federal return is taxable on your California return. Pre-tax contributions and investment earnings are fully taxable when distributed. Any part of a distribution that represents money you already paid tax on (after-tax or non-deductible contributions) is not taxed again.
This applies to defined benefit pensions, 401(k)s, 403(b)s, 457 plans, and traditional IRAs. Qualified Roth distributions are the exception: if you meet the federal requirements for tax-free treatment (account open at least five years and you’re 59½ or older), California treats the withdrawal as tax-free as well.
California residents owe state tax on all income no matter where it was earned or where the plan is based.1Franchise Tax Board. Residents There is no general pension deduction that shelters a slice of your retirement income the way some other states allow. If it’s taxable federally, it’s almost certainly taxable here too.
The Rates That Apply to Pension Income
California uses the same nine-bracket schedule for pension income that it uses for wages. Rates start at 1% on roughly the first $10,000 of taxable income for a single filer and climb to 12.3% above about $700,000. A 1% Mental Health Services Tax adds on top of that for taxable income above $1 million, bringing the effective ceiling to 13.3%. Thresholds adjust for inflation each year and vary by filing status.
Your pension stacks on your other income. A retiree drawing $60,000 from a pension and $30,000 from part-time work pays California tax on $90,000 of combined income, with each dollar taxed at whatever bracket it lands in. There is no preferential rate for pension income.
Retirement Income California Does Not Tax
Social Security
California does not tax Social Security retirement, survivor, or disability benefits.2State of California. Special Circumstances This matters because the federal government can tax up to 85% of Social Security depending on your total income. Any Social Security amount pulled into your federal adjusted gross income is subtracted back out on Schedule CA when you file your state return.3Franchise Tax Board. Social Security
Railroad Retirement
Tier 1 Railroad Retirement benefits, which parallel Social Security, are fully exempt. Tier 2 benefits reported on federal Form RRB-1099-R are also excluded from California income.3Franchise Tax Board. Social Security
Certain Disability Retirement Pay
Disability retirement benefits from California public retirement systems such as CalPERS or CalSTRS may be exempt when the benefit compensates you for a job-related injury or illness rather than being a service-based retirement payment.4CalPERS. Service and Disability Retirement Once you reach normal retirement age, a disability benefit may convert into a service retirement benefit and lose the exemption. The details depend on your plan and how your disability was determined.
The Military Pension Exclusion
California taxed military retired pay in full for years. That changed starting with the 2025 tax year. Eligible veterans and surviving spouses can now exclude up to $20,000 per year of military retired pay and Survivor Benefit Plan payments from California taxable income.5Soldier for Life. 2026-02 MAB State Tax Breaks Expand
The exclusion phases out at higher incomes. You must have federal adjusted gross income under $125,000 (single) or $250,000 (joint) to claim it.5Soldier for Life. 2026-02 MAB State Tax Breaks Expand You claim it as a subtraction on Schedule CA. Because it caps at $20,000, military retirees with larger pensions still owe California tax on the excess.
Retired Public Safety Officer Health Insurance
Retired law enforcement officers, firefighters, chaplains, and rescue or ambulance crew members may direct up to $3,000 per year from an eligible governmental retirement plan straight to a health or long-term care insurance premium and exclude that amount from gross income under the federal HELPS Act.6Internal Revenue Service. Publication 575 – Pension and Annuity Income The payment must go from the plan directly to the insurer. Because California follows federal treatment of retirement distributions, this reduces state taxable pension income too.
Early Withdrawal Penalties Before Age 59½
Pulling money from a retirement account before age 59½ triggers penalties at both levels. The federal add-on tax is 10% of the taxable portion.7Internal Revenue Service. Exceptions to Tax on Early Distributions California adds 2.5% on top of that. For SIMPLE IRAs within the first two years of participation, the penalties climb to 25% federal and 6% state.8Franchise Tax Board. Early Distributions
A California resident who takes a $50,000 early 401(k) distribution with no applicable exception would face a combined 12.5% penalty ($6,250) on top of regular federal and state income taxes on the full amount.
Federal law recognizes several exceptions that waive the 10% penalty, including separation from service at age 55 or older from an employer plan, total disability, substantially equal periodic payments, unreimbursed medical expenses above 7.5% of AGI, and up to $10,000 in first-time homebuyer expenses from an IRA.7Internal Revenue Service. Exceptions to Tax on Early Distributions California generally conforms to most of these, but conformity isn’t automatic for every change Congress makes. The California penalty is reported on Form FTB 3805P, attached to your state return.8Franchise Tax Board. Early Distributions
If You Move Out of California
Federal law bars states from taxing the retirement income of people who don’t live in them. Under 4 U.S.C. § 114, California cannot tax pension distributions paid to a resident of another state, even if the pension was earned entirely through California employment. The protection covers qualified plans, 403(a) and 403(b) plans, 457 plans, IRAs, SEPs, governmental plans, and military retired pay, and it extends to certain non-qualified deferred compensation paid out on a long-term periodic schedule.9Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
If you move during the year, you split the income. Pension paid to you while you were a California resident is taxable to California. Pension paid after you establish residency elsewhere is not, even if you spent your whole career in California.10Franchise Tax Board. Part-Year Resident and Nonresident
What matters is when your California residency actually ends. Buying a house in Nevada isn’t enough if you’re still spending most of your time in California, keeping a California home, and holding a California driver’s license. The Franchise Tax Board weighs the full picture of your ties to the state, and residency disputes are one of the more common audit fights the FTB brings against retirees.
Withholding and Estimated Tax Payments
Most pension payers withhold federal income tax automatically. Without a Form W-4P on file, federal tax is withheld as if you’re single with no adjustments. You can raise, lower, or in most cases turn off federal withholding by submitting Form W-4P.11IRS. 2026 Form W-4P – Withholding Certificate for Periodic Pension or Annuity Payments
California withholding runs on its own track. Plans typically withhold state tax for California residents based on the distribution amount and the information you provide. If withholding falls short of your total California liability, you make quarterly estimated payments on Form 540-ES.
Federal estimated tax deadlines for 2026 fall on April 15, June 15, September 15, and January 15, 2027.12Internal Revenue Service. Publication 509 (2026), Tax Calendars California’s schedule generally lines up. To avoid an underpayment penalty, pay in at least 90% of the current year’s tax or 100% of last year’s through combined withholding and estimates. If your prior-year AGI was above $150,000 ($75,000 if married filing separately), that prior-year safe harbor rises to 110%.13Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
Reporting Pension Income on Your California Return
Each January your plan sends you a Form 1099-R showing the gross distribution and the taxable portion. The taxable amount flows into your federal adjusted gross income, which becomes the starting point for your California return.14Franchise Tax Board. 2025 Instructions for Form 540
Full-year residents file Form 540. Part-year residents and nonresidents file Form 540NR.15Franchise Tax Board. 2025 Instructions for Schedule CA (540NR) Either way, Schedule CA is where you reconcile federal and California differences. The Social Security exclusion, Railroad Retirement exemption, and military retired pay subtraction are all claimed there as adjustments to federal income.14Franchise Tax Board. 2025 Instructions for Form 540 If you took an early distribution and owe the 2.5% state penalty, attach Form FTB 3805P.8Franchise Tax Board. Early Distributions