Maryland Pension and 401(k) Tax Guide (2026)

Planning for retirement involves understanding how much of your hard-earned savings will go to federal and state tax agencies. If you are retiring in Maryland, you need to know how the state treats retirement distributions.

Unlike Social Security, which is completely tax-free at the state level in Maryland, pensions and distributions from 401(k), 403(b), and Traditional IRA accounts are generally subject to state and county income taxes. However, Maryland offers a unique Pension Exclusion that can significantly reduce your tax liability. This guide explains the rules, limits, and filing procedures for 2026.

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Direct Answer: Does Maryland Tax Pensions and 401(k) Distributions?

Yes, but qualified retirees can exclude a substantial portion of this income.

Under the Maryland Pension Exclusion, individuals who are 65 years of age or older (or who are permanently and totally disabled) can exclude a portion of their qualified pension or employee retirement system income from state and local income taxes.

For the 2026 tax year, the maximum exclusion amount is capped at approximately $39,000 to $41,000 per eligible person (the exact limit is tied to the maximum annual Social Security benefit and is finalized annually by the Comptroller).

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What Distributions Qualify for the Pension Exclusion?

To qualify for the standard Maryland Pension Exclusion, your retirement income must come from a qualified employee retirement system.

Eligible Retirement Plans:

1. Defined Benefit Pensions: Traditional pension plans from federal, state, or local government employers, or private employers.
2. Employer-Sponsored 401(k) and 403(b) Plans: Pre-tax distributions from retirement plans sponsored by an employer where you worked.
3. Qualified 457(b) Plans: Government or non-profit deferred compensation plans.

Ineligible Retirement Plans:

• Traditional IRAs: Withdrawals from standard Traditional IRAs do not qualify for the pension exclusion under Maryland law.
• Simplified Employee Pensions (SEP IRAs): Distributions from SEP IRAs do not qualify.
• Keogh Plans: Self-employed retirement plans do not qualify.
• Roth IRAs: Roth distributions are already tax-free (since they were made with after-tax dollars) and do not need to be excluded.

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The Age Rule: When Can You Claim the Exclusion?

• Under Age 65: You cannot claim the standard pension exclusion unless you are permanently and totally disabled, or if you receive military retirement benefits (which fall under a separate exemption program).
• Age 65 or Older: You can claim the exclusion on any qualifying employee retirement system distribution up to the annual maximum limit.

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How to Calculate Your Pension Exclusion (Example)

Suppose you are a 68-year-old single retiree living in Howard County. Your 2026 retirement income consists of:

• Social Security: $24,000 (100% tax-free in Maryland)
• Employer Pension: $35,000
• Traditional IRA: $10,000 (taxable)

Here is how your Maryland tax is calculated:

1. Your Social Security income ($24,000) is deducted using the Social Security subtraction.
2. Your Traditional IRA distribution ($10,000) is fully taxable.
3. Your Employer Pension ($35,000) qualifies for the pension exclusion. Since $35,000 is below the annual exclusion limit (e.g., $39,000), you can exclude the entire $35,000 from your Maryland taxable income.
4. Total taxable retirement income: $10,000 (only the IRA portion).

If your pension was $50,000, you would subtract the maximum limit (e.g., $39,000) and pay tax on the remaining $11,000.

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Step-by-Step: Claiming the Exclusion on Your Return

1. File Maryland Form 502 (resident tax return).
2. Report all retirement income on your federal return (Form 1040), which carries over to your Maryland return.
3. Complete Form 502, Page 2 (the Pension Exclusion Computation section).
4. Enter the taxable amount of your qualified pension distributions.
5. Deduct any Social Security benefits you received, as they offset the maximum pension exclusion limit dollar-for-dollar.
6. Transfer the final allowed exclusion amount to Form 502, Line 10 to reduce your Maryland taxable income.

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Frequently Asked Questions (FAQs)

Can both spouses claim the pension exclusion on a joint return?

Yes. If both spouses are 65 or older and both receive qualifying pension distributions, each spouse can calculate and claim their own exclusion limit (up to the annual cap) on their joint Maryland return.

What if I retired from a job in another state?

Maryland taxes all retirement income of its residents, regardless of where the income was earned. However, out-of-state pensions qualify for the Maryland Pension Exclusion under the same age and plan rules as local pensions.

Are federal pensions subject to Maryland tax?

Yes, federal pensions (CSRS and FERS) are taxable, but they are fully eligible for the standard Maryland Pension Exclusion.