Iowa for retirees: Social Security untaxed, and nothing on pensions and IRAs from age 55

Most Iowa retirees owe Iowa no income tax, and many need not file. Social Security comes off on IA 1040 Schedule 1 line 5 whatever your age or income. From the year you are 55 on December 31, every pension, IRA distribution, 401(k) and 403(b) withdrawal, deferred compensation payment and Roth conversion comes off on line 7, in full, with no dollar limit; the same subtraction goes to anyone who is disabled and to a surviving spouse or other survivor of someone who qualified. Military retirement pay comes off at any age. What Iowa still taxes, at its flat 3.8%, is everything else: interest, dividends, capital gains, rent, and wages if you are still working. For the couple living on Social Security, a pension and IRA withdrawals, the Iowa return is a formality. For the 54-year-old thinking about a Roth conversion, it is a reason to wait a year.

The rule dates from House File 2317, signed March 1, 2022, effective for 2023. Iowa Code 422.7(19) subtracts “the total amount received from a governmental or other pension or retirement plan” for a taxpayer who is disabled, “fifty-five years of age or older,” or a qualifying surviving spouse or survivor. The age is 55, not 59½ and not 65.

Social Security, at any age

Iowa does not tax Social Security benefits. Whatever portion is taxed federally, the figure on Form 1040 line 6b, is subtracted on Schedule 1 line 5; railroad retirement Tier 1 is treated the same way. Benefits count toward one Iowa test only, the worksheet for the health insurance premium deduction at 65 and older.

Retirement income, from 55

The subtraction is of the federally taxable amount, not the gross. A $30,000 pension with $2,000 of after-tax basis recovered is a $28,000 subtraction, because $28,000 is what reached federal taxable income.

The age test. You qualify for the whole year if you are 55 on December 31; a distribution taken in March of the year you turn 55 in November is subtracted. Each spouse is tested separately, so a 57-year-old’s pension is subtracted and a 52-year-old spouse’s 401(k) withdrawal is taxed at 3.8%.

Under 55 and not disabled. Retirement income is taxed in full at 3.8%: an early 401(k) cash-out, an inherited IRA paid to a 45-year-old, a Roth conversion done at 54. Iowa has no early-withdrawal penalty of its own.

Survivors. A surviving spouse receiving the decedent’s pension, and any survivor with an insurable interest in a decedent who would have qualified, takes the subtraction at any age. A lump-sum distribution taxed under federal Form 4972 is exempt from the Iowa lump-sum tax for the same group.

Roth conversions

A conversion is a distribution from a traditional IRA reported on federal line 4b, and line 4b income is what Schedule 1 line 7 subtracts. So at 55 and older a Roth conversion costs federal tax and nothing in Iowa, however large: $100,000 converted in the 22% federal bracket costs about $22,000 federally and $0 here, where 3.8% would have been $3,800. The decision is a purely federal one for an Iowa retiree, and the Iowa years are the time to convert for anyone who may later move to a state that taxes IRA income.

The birthday is the whole question for a younger converter. A $50,000 conversion at 54 costs $1,900 of Iowa tax; the same conversion the following year costs nothing. The federal side keeps its teeth: a conversion raises AGI, which can make more Social Security taxable, raise Medicare premiums two years later through IRMAA, and shrink the $6,000 senior deduction, which phases out above $75,000 single and $150,000 joint. See IRMAA and Roth IRAs and the backdoor Roth.

The federal senior deduction in Iowa

The $6,000 deduction for taxpayers 65 and older, in effect for 2025 through 2028, comes off federal taxable income, so it reduces Iowa taxable income too. The IA 1040 reports it on line 1f and treats it as a personal exemption that is added back for four tests only: the low-income exemption, the alternate tax, the tax reduction worksheet and the health insurance deduction. For the retiree whose pension and Social Security are already subtracted it is moot. It matters to the retiree with a taxable brokerage account or rental, where it shelters another $6,000 a person from the 3.8%, and to the 65-year-old still working, who can file a new IA W-4 so withholding reflects it.

Iowa’s own age items are small. Each taxpayer who is 65 by January 1 following the tax year gets a $20 exemption credit on top of the $40. The low-income exemption rises to $24,000 single and $32,000 joint at 65. And a taxpayer 65 or older with net income under $100,000 may deduct health and long-term care insurance premiums not already deducted federally, Medicare Part B and D and Medigap included, on Schedule 1 line 15, whether or not they itemize.

What Iowa still taxes

Interest, dividends, capital gains, rent, business income and wages, all at 3.8% after the federal deductions. There is no preferential rate for long-term gains, so a retiree rebalancing a taxable account pays 3.8% on a gain the IRS taxed at 0%. The federal home-sale exclusion flows through, since excluded gain never reaches federal taxable income; Iowa’s own capital gain deduction no longer covers a house, a business or securities. Nonqualified annuities bought outside a retirement plan are the one retirement-sounding item that stays taxable, because the subtraction is for pension and retirement plans.

Retired farmers: two elections, choose one

A farmer who is 55 or older or disabled, has owned the land and materially participated in farming it for ten or more years, and no longer materially participates, has two Iowa exclusions available and may take only one. The first is the farm tenancy income exclusion on IA 125: net income from a written lease, cash rent, crop share, flex or livestock share, subtracted on Schedule 1 line 18 every year for life. The second is the retired farmer capital gain election on IA 100G: the gain on sale of the farm real property, and on breeding, draft, dairy or sport livestock, subtracted on line 16. Both are irrevocable, and the Department’s summary says a taxpayer who elects the lease exclusion “cannot also claim the capital gain exclusion or the beginning farmer tax credit in the election year or later years.” A farmer who means to rent the ground for a decade and then sell it should run both numbers before signing anything.

Withholding and estimates

Since retirement income is not taxed from 55, Iowa withholding on it serves no purpose; the IA W-4P, given to the pension payer or IRA custodian, lets a retiree certify that none is required. The retirees who need estimated payments are the ones with large taxable brokerage income, rent or a gain from a sale. Estimates are required when the Iowa tax expected after withholding and credits is $1,000 or more, due April 30, June 30, September 30 and January 31. A retiree under 55 drawing a pension is the exception: that income is taxed, and withholding or estimates are needed.

Property tax relief: at the courthouse, not on the return

Iowa puts its help for older homeowners on the property tax bill, through the county assessor and treasurer, and none of it is claimed on the IA 1040. 2026 brought the largest change in years.

The income tests for the credit count Social Security and retirement income in full, even though the income tax ignores them. SF 2472 also caps most local property tax revenue growth at about 2% a year from the budget year beginning July 2027.

The exemptions reduce the value the levy is applied to, so their worth depends on the local rate. At $35 per $1,000 of taxable value, the $6,500 exemption for owners 65 and older is worth about $228 a year, and the 10% exemption on a home with $150,000 of taxable value is worth about $525 against roughly $170 under the old credit (verify). The 65-and-older exemption is the one most often missed: the application has to reach the assessor by July 1 of the year you turn 65 or move in.

Moving in, moving out

Federal law since 1996 bars any state from taxing the retirement income of someone who no longer lives there, so a pension earned elsewhere and paid to a new Iowa resident of 55 or older is untaxed anywhere. The reverse holds too: an Iowan who retires to a state with an income tax starts paying that state’s tax on the same pension. The move-year return is in Moving to Iowa.

Iowa has no inheritance tax for deaths on or after January 1, 2025, no estate tax and no gift tax. Nothing is owed to the state on what a retiree leaves. An inherited IRA paid to a beneficiary who is 55 or older is retirement income Iowa subtracts; paid to a younger beneficiary, it is taxed at 3.8% as withdrawn.