Does Montana Tax Pensions and Retirement Income?

Yes, Montana taxes pensions and retirement income. The state treats distributions from 401(k)s, traditional IRAs, private and public employer pensions, and federal government pensions as ordinary taxable income, and it taxes part of Social Security for retirees above certain income levels. Some relief exists: taxpayers 65 and older get a $5,500 subtraction from taxable income, qualifying military retirees who work in Montana can shelter up to half their military pension, qualified Roth distributions pass through untaxed, and railroad retirement benefits are fully exempt under federal law.

Which Retirement Income Montana Taxes

Montana calculates state tax starting from your federal taxable income, so whatever pension or distribution amount hits your federal return flows straight onto your Montana return.¹ The following types of retirement income are taxable in Montana:

Private employer pensions, including defined benefit payments and distributions from 401(k), 403(b), and 457 plans.
Traditional IRA withdrawals, including required minimum distributions.
Public employee pensions from state, county, municipal, and school district retirement systems.
Federal government pensions, including the Civil Service Retirement System and the Federal Employees Retirement System.

A pension earned from work in another state is still taxable in Montana once you live here. Taking your balance as a lump sum does not change how Montana treats it; the entire taxable amount lands on one year’s return, which can push you into the higher bracket. Federal law requires 20% federal withholding on qualified plan lump sums, but Montana withholding is not always automatic, so estimated payments may be needed to cover the state side.²

Roth IRAs

Qualified Roth IRA distributions, taken after age 59½ and at least five years after your first contribution, are excluded from federal taxable income. Because Montana starts from that number, qualified Roth withdrawals are also tax-free at the state level. Early or non-qualified Roth withdrawals that show up as taxable federally are taxable in Montana too.

Does Montana Tax Social Security?

Yes. Montana is one of only eight states that still tax Social Security benefits, and it follows the federal formula. The trigger is your combined income, which is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.³

Single filers with combined income below $25,000 (joint filers below $32,000): no benefits are taxable.
Single filers between $25,000 and $34,000 (joint filers between $32,000 and $44,000): up to 50% of benefits are taxable.
Single filers above $34,000 (joint filers above $44,000): up to 85% of benefits are taxable.

Whatever portion is taxable federally is also taxable in Montana. A retiree living on Social Security alone often falls below these thresholds entirely, but adding a pension, IRA withdrawals, or investment income pulls a larger share of benefits into the taxable range.

Retirement Income That Is Exempt or Reduced

The $5,500 Subtraction at Age 65

Montana lets taxpayers 65 and older subtract $5,500 from federal taxable income. On a joint return where both spouses are 65 or older, the subtraction is $11,000.¹ The amount is adjusted for inflation each year starting with tax year 2025, so the current-year figure may be slightly higher than the base. The subtraction applies regardless of income source, so retirees with pensions, investment income, and part-time wages all benefit, and there is no income phase-out.

Military Retirement

Qualifying military retirees can subtract part of their military pension from Montana taxable income for up to five consecutive years.⁴ The subtraction equals the lesser of your Montana-source wage income or 50% of your military pension.⁵ The wage requirement is the catch. A fully retired veteran with no Montana earned income gets zero from this provision, which the program’s formal name, the Working Military Retirement Exemption, signals.

Recipients of military survivor benefits can exempt up to 50% of those payments without the wage-income limitation. To qualify for either version, you must either have been a Montana resident before receiving the pension or have become a resident after June 30, 2023. Residents who qualified before that date can use the exemption through tax year 2028, and the provision sunsets on December 31, 2033.⁵

Railroad Retirement

Railroad retirement annuities, both Tier 1 and Tier 2, are fully exempt from Montana income tax under federal law.⁶ No special deduction is needed; the income simply does not enter your Montana taxable income.

Montana’s 2026 Tax Rates

Montana has two brackets for ordinary income. HB 337 lowered the top rate and widened the brackets for tax year 2026:⁷

Single and married filing separately: 4.7% on the first $47,500 of taxable income, 5.65% above that.
Head of household: 4.7% on the first $71,250, 5.65% above.
Married filing jointly: 4.7% on the first $95,000, 5.65% above.

In 2025, by comparison, the top rate was 5.9% and kicked in at $21,100 for single filers and $42,200 for joint filers.⁸ Most retirees with moderate pension income will see a lower effective rate in 2026 than they paid in recent years.

Montana has no separate state standard deduction; the federal standard deduction is already inside the federal taxable income figure Montana starts from. That means the federal enhanced senior deduction available for 2025 through 2028, an additional $6,000 (or $12,000 for two qualifying spouses) subject to income phase-outs, reduces your Montana tax automatically.⁹

Withholding and Estimated Payments

Pension income and IRA distributions do not always come with state tax withheld. If you owe Montana tax and do not have enough withheld or paid in through estimates, you can face an underpayment penalty. To avoid it, your combined withholding and estimated payments must equal at least 90% of your current-year tax or 100% of your prior-year tax.¹⁰

Two situations waive the estimated payment requirement:

Your total tax after credits and withholding is under $500 for the year.
You retired during the tax year after reaching age 62, or became disabled during the year. The waiver covers that year and the next.¹⁰

The cleanest fix is to ask your pension administrator or IRA custodian to withhold Montana tax directly. Most allow federal and state withholding on the same form. Getting withholding set correctly in the first year of retirement prevents a surprise bill in April.

If You Move Out of Montana

Montana cannot tax your pension once you become a resident of another state. Federal law bars states from taxing retirement income paid to former residents, and the protection covers qualified retirement plans, IRAs, government pensions, and deferred compensation.¹¹ Other Montana-source income, such as rent from property you kept or income from a business you still run here, remains taxable on a nonresident return, but the pension itself does not.

1
Montana Department of Revenue. Montana Tax Simplification Resource Hub
2
Internal Revenue Service. Topic No. 412, Lump-Sum Distributions
3
Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable
4
Montana Department of Revenue. Working Military Retirement Exemption
5
Montana State Legislature. Montana Code 15-30-2120 – Adjustments to Federal Taxable Income
6
Office of the Law Revision Counsel. 45 USC 231m – Assignability; Exemption From Levy
7
Montana Department of Revenue. HB337: 2026-2027 Montana Individual Income Tax Changes
8
Montana Department of Revenue. 2025 Montana Tax Tables and Deductions
9
Internal Revenue Service. Check Your Eligibility for the New Enhanced Deduction for Seniors
10
Montana State Legislature. Montana Code 15-30-2512 – Estimated Tax, Payment, Exceptions, Interest
11
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income