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 is $40,600 per eligible person, down from $41,200 for 2025 (source: Comptroller of Maryland, Maryland Pension Exclusion). The cap is tied to the maximum annual Social Security benefit, so it can fall as well as rise.

The part almost everyone misses: that $40,600 is reduced dollar for dollar by every dollar of Social Security and Railroad Retirement you receive — and the worksheet asks for all of it, not just the portion your federal return taxed. If you collect $24,000 of Social Security, your maximum exclusion is $40,600 − $24,000 = $16,600. If you collect more than $40,600, the exclusion is zero. (Social Security itself is still untaxed by Maryland — it reduces this exclusion without ever being taxed.) Use the Maryland Retirement Tax Calculator to see the offset applied to your own numbers.

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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.
• Rollover IRAs: Rolling a qualifying 401(k) into an IRA converts excludable income into non-excludable income. This is the single most expensive unforced error in Maryland retirement planning — the money qualified while it sat in the employer plan and stops qualifying the moment it lands in the IRA.
• Simplified Employee Pensions (SEP IRAs): Distributions from SEP IRAs do not qualify.
• Keogh Plans: Self-employed retirement plans do not qualify.
• Ineligible deferred compensation plans: Non-governmental deferred comp that is not a qualified 457(b) does not qualify.
• Foreign retirement income: Pensions from outside the United States 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 your spouse is. Two separate programs cover specific careers before 65: military retirement pay has its own subtraction, and retired rangers have their own exclusion (below).
• Age 65 or Older: You can claim the exclusion on any qualifying employee retirement system distribution up to the annual maximum limit. Age is measured on the last day of the tax year — turning 65 in February 2027 does nothing for your 2026 return.

The 55-to-64 Route: Retired Forest, Park, and Wildlife Rangers

Maryland runs a second pension exclusion for people whose retirement income comes from service as a forest ranger, park ranger, or wildlife ranger of the United States, the State of Maryland, or a Maryland political subdivision. It exists precisely to cover the years the standard exclusion does not:

• You were 55 or over on the last day of the tax year, and
• You were not 65 or older and not totally disabled (and your spouse is not totally disabled) — if you are, you use the standard exclusion instead, and
• The income is qualifying pension income from a 401(a), 403, or 457(b) plan attributable to that ranger service.

You compute it on Worksheet 13E rather than 13A and carry the result to line 10b of Form 502. One taxpayer cannot claim both this and the standard exclusion — but on a joint return, one spouse can claim each, if each qualifies on their own facts.

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How to Calculate Your Pension Exclusion (Example)

Suppose you are a 67-year-old single retiree in Baltimore County (3.20% local rate). Your 2026 retirement income is:

• Social Security: $24,000 — completely exempt from Maryland state and county tax
• Employer Pension: $35,000 — qualifies for the exclusion
• Traditional IRA: $10,000 — does not qualify

Here is how Maryland actually works it out:

1. Social Security drops out of the Maryland calculation entirely. It is still partly taxable federally — $20,400 of it here.
2. Your exclusion is not the full $35,000. The cap is $40,600 minus the $24,000 of Social Security you received, so your maximum exclusion is $16,600.
3. That leaves $35,000 − $16,600 = $18,400 of pension income still taxable by Maryland.
4. The $10,000 IRA distribution is taxable in full.
5. Maryland taxable retirement income before deductions: $28,400 — not $10,000.

After the standard deduction, personal exemption and the extra $1,000 senior exemption, that works out to about $938 in Maryland state tax and $667 in county tax, plus $5,668 federal — $7,273 total on $69,000 of income, an effective rate of 10.54%.

Push the pension to $50,000 with no IRA and the exclusion stays pinned at $16,600, because it is limited by your Social Security rather than by your pension: about $1,175 state and $827 county tax, $8,661 total.

Why this matters: an earlier version of this guide said the whole $35,000 could be excluded and that only the $10,000 IRA would be taxed. That was wrong — it ignored the Social Security offset, and it understated Maryland taxable income by $18,400. If you planned around that figure, re-run it on the Maryland Retirement Tax Calculator, which applies the offset automatically.

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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. Find the Pension Exclusion Computation Worksheet (13A) in Instruction 13 of the Form 502 instruction booklet. It is a worksheet in the instructions, not a numbered line on the return itself, which is why it is so often skipped.
4. Enter the taxable amount of your qualified pension distributions on line 2 of the worksheet.
5. On line 3, enter all Social Security and Railroad Retirement benefits you received — not just the portion your federal return taxed. This is the step that trips people up: they copy the taxable figure from the 1040 and overstate their exclusion.
6. Transfer the worksheet's line 5 result to Form 502, line 10a. If you are also reporting on Form 502R, the same figure goes in Part 6, line 11.

Claiming the ranger exclusion instead? Use Worksheet 13E and line 10b. Claiming both a standard and a ranger exclusion as a couple? Each spouse computes their own worksheet, and the totals go on their respective lines.

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The Retiree Breaks That Stack With the Pension Exclusion

The pension exclusion is not the only thing on the table, and two of these can be claimed in the same year as the exclusion. Skipping them is the second most common way Maryland retirees overpay.

Public Safety Retirement Income Subtraction — up to $15,000

If you retired as a correctional officer, law enforcement officer, or fire, rescue, or emergency services member of the United States, the State of Maryland, or a Maryland political subdivision, you can subtract up to $15,000 of that retirement income from age 55. It applies to 401(a), 403, and 457(b) income attributable to that service.

You may claim this and the standard pension exclusion in the same year — but you cannot count the same dollars twice. Anything you subtract here must be left out of the amount you carry into Worksheet 13A. Claim it with code letter v on line 13 of Form 502, attach Form 502SU, and report it in Part 5, line 10 of Form 502R.

Senior Tax Credit — $1,000 or $1,750

Separate from any subtraction, Maryland gives a non-refundable credit to filers who are 65 or older on the last day of the tax year (source: Comptroller of Maryland, Technical Bulletin 51):

• $1,000 if you are single, married filing separately, or a dependent taxpayer with federal adjusted gross income of $100,000 or less.
• $1,750 if you file jointly, as a qualifying surviving spouse, or as head of household with federal AGI of $150,000 or less — reduced to $1,000 if only one spouse is 65 or older.

Non-refundable means it can erase your Maryland tax but will not pay you beyond that. Claim it in Part M of Form 502CR. Part-year residents claim the full amount without prorating.

Two More Worth Knowing

• Military retirement: a subtraction of $20,000 at age 55 or older, $12,500 under 55, using code letter u. See Maryland's military retirement tax exemption for the detail.
• The extra exemption at 65: an additional $1,000 personal exemption once you reach 65 by the last day of the taxable year (also available if you are blind), on top of the standard $3,200 exemption.

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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.

Does Maryland tax 401(k) withdrawals before age 65?

Yes, in full. The pension exclusion is gated on age 65 (or total disability, or qualifying ranger service at 55+), so an early withdrawal at 58 gets no Maryland exclusion at all — it is taxed at your state rate plus your county rate on top. That is the argument for timing discretionary withdrawals after 65 where you have the choice.

Should I roll my 401(k) into an IRA if I am retiring in Maryland?

Consider the Maryland cost before you do. A 401(k) qualifies for the pension exclusion; a Traditional or Rollover IRA does not. Moving a qualifying balance into an IRA can convert up to $40,600 a year of excludable income into fully taxable income, at state plus county rates. There are legitimate reasons to roll over — investment choice, consolidation, fees — but for a Maryland resident 65 or older it is a decision with a recurring annual price tag, not a neutral housekeeping move.