Yes, Colorado does tax 401(k) withdrawals. Traditional 401(k) distributions are treated as ordinary income and taxed at the state’s flat 4.40% rate, the same as wages.1Justia Law. Colorado Revised Statutes Title 39 – Section 39-22-104 What softens the hit is Colorado’s pension and annuity subtraction, which lets qualifying retirees remove a large chunk (and, starting with the 2026 tax year, potentially all) of that income before the rate applies. Roth 401(k) qualified distributions and direct rollovers are not taxed at all.
How the 4.40% Rate Applies
Colorado uses a single flat rate rather than graduated brackets. The starting point for your state return is your federal taxable income, and because a traditional 401(k) withdrawal is included there, it carries into Colorado automatically. From that base, Colorado adds or subtracts specific items to reach the amount actually taxed at 4.40%.1Justia Law. Colorado Revised Statutes Title 39 – Section 39-22-104 For 401(k) money, the subtraction is the piece that matters.
The Pension and Annuity Subtraction
Traditional 401(k) distributions are explicitly listed as qualifying income for Colorado’s pension and annuity subtraction, along with pensions, annuities, and other distributions from employer-sponsored retirement plans.2Legal Information Institute. Colorado Code 39-22-104(4)(f) – Pension and Annuity Subtraction Through the 2025 tax year, the amount you could subtract depended on your age at year-end:
- Age 55 to 64: up to $20,000 of qualifying retirement income.3Colorado Department of Revenue – Taxation. Information for Retirees
- Age 65 and older: up to $24,000.3Colorado Department of Revenue – Taxation. Information for Retirees
- Under age 55: no subtraction, unless you were receiving benefits as a survivor (such as a widowed spouse or orphan child) of the person who originally earned the pension.3Colorado Department of Revenue – Taxation. Information for Retirees
Married couples filing jointly each get their own subtraction based on their own age and income. A 66-year-old and a 60-year-old could shelter up to $44,000 combined if each spouse had enough qualifying income of their own.
What Changes in 2026 Under SB25-136
Colorado’s General Assembly passed SB25-136, which eliminates all dollar caps on the pension and annuity subtraction for income tax years starting on or after January 1, 2026. Any individual, regardless of age or income level, can subtract the full amount of pension and annuity income included in federal taxable income.4Colorado General Assembly. SB25-136 Expand Deduction for Retirement Benefits
The practical result: a $60,000 traditional 401(k) distribution in 2026 could be fully subtracted from Colorado taxable income. Under the old rules, someone under 55 taking that same $60,000 would have owed roughly $2,640 in Colorado income tax on it. Under SB25-136, that number drops to zero at the state level. Confirm the bill’s final implementation with the Department of Revenue before filing, since form and line-item guidance for claiming the expanded subtraction may still be catching up.
Early Withdrawals Before Age 59½
The federal government imposes a 10% early withdrawal penalty on 401(k) distributions taken before age 59½, unless an exception applies (disability, substantially equal periodic payments, or separation from service after age 55, among others).5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Colorado does not impose a separate state-level early withdrawal penalty. The withdrawal is taxed at the same 4.40% flat rate as any other income; there is no additional state surcharge tied to the federal 10%. Under the old rules, the real state-side cost of an early withdrawal was losing the pension and annuity subtraction entirely if you were under 55. Once SB25-136 takes effect for 2026, that age gate goes away, so even an early distribution could be fully subtracted from Colorado taxable income. The federal 10% penalty and federal income tax still apply.4Colorado General Assembly. SB25-136 Expand Deduction for Retirement Benefits
Roth 401(k) Distributions
Qualified Roth 401(k) distributions are not in your federal adjusted gross income, because tax was already paid on the contributions. Since Colorado’s return starts from federal taxable income, a qualified Roth distribution never enters the Colorado calculation at all. Nothing to subtract, nothing to tax.
A distribution counts as qualified if the account has been open at least five years and you are at least 59½, disabled, or the money goes to a beneficiary after your death. The earnings portion of a non-qualified Roth distribution does show up in federal taxable income and follows the same Colorado rules as a traditional 401(k) withdrawal.
Rollovers
A direct rollover from a 401(k) into an IRA or another employer plan is not a taxable event federally, and because it is not in your federal taxable income, it is not taxed by Colorado either. If your 1099-R shows a rollover with distribution code G or H in box 7, you generally owe no Colorado tax on that amount. Watch out for indirect rollovers: if the plan writes you a check, it will typically withhold 20% for federal taxes, and you have to make up that difference from your own pocket within 60 days to complete the rollover tax-free.
Military Retirement Pay
Retired servicemembers under 55 could, under prior law, subtract up to $15,000 of military retirement benefits included in federal taxable income, a carve-out unavailable to civilians in that age group.6Colorado Department of Revenue – Taxation. Retired Servicemembers At 55, military retirees shifted to the regular pension and annuity subtraction. Once SB25-136 removes the caps and age gates for 2026, the practical gap between military and civilian retirees narrows, though the $15,000 provision still matters for amended returns and prior years.
If You Moved In or Out of Colorado
Part-year residents pay Colorado tax on income received while a resident, plus any Colorado-source income earned during the nonresident portion of the year. A 401(k) distribution taken in March while you were living in Texas is not Colorado-taxable even if you moved to Denver in June. You compute what you would owe as a full-year resident, then multiply by the ratio of Colorado-source income to total income, using Form 104PN alongside your main return.7Department of Revenue – Taxation. Income Tax Topics: Part-Year Residents and Nonresidents Colorado treats you as a resident if you are domiciled in the state, or if you keep a permanent home there and spend more than six months of the year in it.
Withholding and Estimated Payments
Retirees get tripped up here more than anywhere else. 401(k) plan administrators don’t automatically withhold Colorado state tax. If federal-only withholding leaves you owing more than $1,000 in net Colorado tax after credits, you’re required to make quarterly estimated payments.8Colorado Department of Revenue. Individual Estimated Income Tax Instructions
For the 2026 tax year, the quarterly deadlines are April 15, June 15, September 15, and January 15, 2027. To avoid an underpayment penalty, total payments during the year must reach the smallest of: 70% of your actual 2026 net Colorado tax, 100% of your 2025 net Colorado tax (if your federal AGI was $150,000 or less, or $75,000 if married filing separately), or 110% of your 2025 net Colorado tax if AGI was above those thresholds.8Colorado Department of Revenue. Individual Estimated Income Tax Instructions
Some plan custodians will withhold Colorado tax on request; practices vary. Ask yours directly. If they won’t, estimated payments are your only option.
Filing the Return
Your plan sends a Form 1099-R showing the gross distribution and the taxable portion. Those figures carry into your Colorado Individual Income Tax Return (Form DR 0104). To claim the pension and annuity subtraction, complete the Subtractions from Income Schedule (Form DR 0104AD).9Colorado Department of Revenue. DR 0104 – Colorado Individual Income Tax Return
Check the distribution code in box 7 of the 1099-R. Code 7 (normal distribution) or code 2 (early distribution, exception applies) tells the IRS and Colorado how to treat the withdrawal. Code 1 (early distribution, no exception) flags the 10% federal penalty. Getting the code right matters because federal treatment feeds directly into your Colorado numbers.