Yes, Arizona does tax IRA distributions, but only the ones that are already taxable on your federal return. The state uses your federal adjusted gross income as its starting point and applies a flat 2.5% income tax rate, so a fully taxable Traditional IRA withdrawal of $30,000 produces $750 in Arizona tax before credits.1Arizona Department of Revenue. Individual Income Tax Information2Arizona Legislature. Income Tax Rate Reduction Surplus Qualified Roth IRA distributions, which never enter your federal AGI, escape Arizona tax entirely.
How the Tax Gets Calculated
Arizona conforms to federal AGI. Whatever portion of your IRA distribution is taxable federally flows straight onto your Arizona return at the same amount; the state doesn’t recalculate what’s taxable.3Justia. Arizona Administrative Code R15-2C-201 – Additions to and Subtractions from Arizona Gross Income
From that federal number, Arizona applies state-specific additions and subtractions to arrive at Arizona adjusted gross income, then applies the 2.5% flat rate that has been in effect since tax year 2023.2Arizona Legislature. Income Tax Rate Reduction Surplus There’s no separate Arizona bracket for retirement income and no separate calculation of the taxable portion of an IRA withdrawal.
Traditional IRA Distributions
Traditional IRA withdrawals are generally fully taxable federally because the original contributions were tax-deductible. That full amount lands in your federal AGI and gets taxed by Arizona at 2.5%. If you made nondeductible contributions, the portion representing those after-tax dollars isn’t taxable federally, and it passes through to Arizona the same way: not taxed federally, not taxed by Arizona.
Roth IRA Distributions
Qualified Roth withdrawals are tax-free federally because you contributed after-tax dollars.4Internal Revenue Service. Roth IRAs Since they never enter federal AGI, they never enter Arizona gross income either. A qualified Roth distribution is invisible to the Arizona income tax system. The state’s withholding rules confirm this directly: you cannot request Arizona withholding on Roth IRA payments because those amounts aren’t includable in Arizona gross income.5Arizona Department of Revenue. Arizona Withholding Tax
The $2,500 Pension Subtraction Usually Won’t Help
Arizona offers a subtraction of up to $2,500 per taxpayer for certain retirement income, and many retirees assume it covers their IRA. It doesn’t. The statute limits the subtraction to benefits, annuities, and pensions received from federal government retirement plans (like CSRS or FERS) and from Arizona state or local government retirement plans.6Arizona Legislature. Arizona Code 43-1022 – Subtractions From Arizona Gross Income Arizona Form 140 labels the line as an “Exclusion for federal, Arizona state or local government pensions (up to $2,500 per taxpayer).”7Arizona Department of Revenue. 2025 Arizona Form 140 Resident Personal Income Tax Booklet
The statute mentions retirement plans “established by federal law,” which sounds like it might include IRAs. The Arizona Department of Revenue has interpreted the provision as applying to government pension income, not to distributions from private retirement accounts like Traditional IRAs or 401(k) plans. If your only retirement income is a private IRA, this subtraction won’t reduce your Arizona tax. If you receive both a government pension and IRA distributions, only the pension portion qualifies.
Roth Conversions Are Taxable in Arizona
Converting a Traditional IRA to a Roth IRA is a taxable event federally, and Arizona follows suit. The converted amount enters your federal AGI in the year of the conversion, which flows to your Arizona return and gets taxed at 2.5%.1Arizona Department of Revenue. Individual Income Tax Information
A $100,000 Roth conversion adds $100,000 to both your federal and Arizona taxable income for that year. At 2.5%, that’s an extra $2,500 in state tax on top of whatever federal tax the conversion generates. The trade-off is that qualified withdrawals from the Roth will later be tax-free at both levels, but the conversion-year tax bill needs to be planned for.
Required Minimum Distributions
Once you reach the required age, the IRS mandates annual distributions from Traditional IRAs. Under the SECURE Act 2.0, taxpayers born between 1951 and 1959 must begin RMDs by the year they turn 73; those born after 1959 start at 75.8Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans Your first RMD is due by April 1 of the year after you reach the applicable age, though waiting until that deadline forces two RMDs into one calendar year.
Arizona treats an RMD like any other Traditional IRA distribution. It lands in your federal AGI, flows to your Arizona return, and is taxed at 2.5%. Roth IRAs do not require RMDs during the owner’s lifetime.
Inherited IRAs
Distributions from an inherited Traditional IRA are taxable to the beneficiary at both the federal and Arizona level, same as they would have been for the original owner. Arizona’s 2.5% rate applies.
The distribution timeline depends on your relationship to the deceased. Surviving spouses have the most flexibility, including rolling the inherited account into their own IRA. Most other beneficiaries must empty the account within 10 years of the original owner’s death under SECURE Act rules, and annual distributions may be required during that window. Compressing a large tax-deferred account into 10 years can push a beneficiary into higher federal brackets, and every dollar also hits Arizona’s 2.5% rate. Spreading withdrawals across the full 10 years usually produces a better outcome than a final-year lump sum.
Early Withdrawals
Arizona does not impose its own early withdrawal penalty. The state simply taxes the distribution at 2.5% like any other income.
The penalty to worry about is federal. Withdrawals from a Traditional IRA before age 59½ generally face a 10% additional federal tax on top of regular income tax.9Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts That 10% is a separate federal tax, not an addition to your AGI, so it doesn’t directly affect what Arizona collects. The distribution itself, however, still counts as income for both federal and Arizona purposes even if a federal exception (such as disability, first-time home purchase up to $10,000, or qualifying medical expenses) eliminates the 10% penalty.
Withholding and Filing
Arizona withholding on retirement distributions is optional. To have state tax withheld at the source, file Arizona Form A-4P with your IRA custodian.5Arizona Department of Revenue. Arizona Withholding Tax Withholding can only be requested on amounts includable in your Arizona gross income, so Roth distributions and nontaxable portions are excluded.
Skipping withholding is a common misstep. Federal withholding is easy to set up through the custodian, but Arizona requires that separate Form A-4P step. Without it, retirees who owe more than a small amount at filing time can face an underpayment penalty and may need to make quarterly estimated payments.
Residents file Arizona Form 140. Federal AGI carries over as the starting point, already reflecting any taxable IRA distributions. Government pension subtractions get claimed at that stage; private IRA distributions do not qualify for that line.7Arizona Department of Revenue. 2025 Arizona Form 140 Resident Personal Income Tax Booklet For a retiree living solely on IRA income, the return is straightforward: federal AGI carries over, the standard deduction reduces it, and 2.5% applies to what remains.
A Bill That Would Change This
The Arizona Legislature introduced SB 1371 during the 2025 session, which would create a new subtraction for distributions from any retirement account for taxpayers age 67 or older. The subtraction would be capped at the standard deduction amount, a substantially larger benefit than the current $2,500 government-pension-only subtraction.10Arizona Legislature. Fact Sheet for S.B. 1371 – Income Tax Subtraction Retirement Distribution The bill passed the Arizona Senate but had not been signed into law as of the latest available information. If enacted, it would apply to tax years beginning January 1, 2025, and would extend a meaningful Arizona subtraction to private IRA distributions for older retirees for the first time.