Does Maryland Tax Retirement Income?

Maryland taxes most retirement income — including pensions, 401(k) distributions, and traditional IRA withdrawals — at state rates up to 5.75% (though Maryland introduced two new tax brackets in 2025: 6.25% and 6.50%). But Maryland does not tax Social Security benefits, and it offers two significant breaks that can dramatically reduce what you owe: a pension exclusion of up to $41,200 (2025) from qualifying employer plan income, and a senior tax credit worth up to $1,750 for residents 65 and older.

The catch is that these benefits have different eligibility rules, apply to different income sources, and interact with each other in ways most people don’t expect. This guide gives you the full picture, income type by income type, so you know exactly where you stand.

How Is Each Type of Retirement Income Taxed in Maryland?

Here’s the quick-reference version. Each income type is covered in more detail below.

Income Type	Taxed in MD?	Notes
Social Security	No	Fully exempt. No forms required.
Pensions (defined benefit)	Partially	Eligible for the pension exclusion (up to $41,200 for 2025), reduced by Social Security.
401(k) / 403(b) / 457(b)	Partially	Eligible for the pension exclusion. Same rules as pensions above.
Traditional IRA	Yes — fully	NOT eligible for the pension exclusion. This is the #1 mistake we see.
Roth IRA (qualified)	No	Tax-free. Doesn’t count toward FAGI for the senior credit.
Military pension	Partially	Up to $12,500 excluded; up to $20,000 if age 55+.
Investment/ rental / annuity	Yes — fully	Taxed at normal Maryland rates. No special exclusion.

Is Social Security Taxed in Maryland?

No. Maryland does not tax Social Security benefits at the state level — including retirement, disability, survivor, and Railroad Retirement benefits. This requires no special form or calculation; Social Security simply isn’t included in your Maryland taxable income.

Your Social Security may still be partially taxed at the federal level depending on your combined income, but Maryland’s full exemption provides meaningful savings. For a couple receiving $40,000 in annual Social Security benefits, this exemption saves roughly $2,300 per year in state taxes alone.

Important interaction: While Social Security isn’t taxed in Maryland, the amount you receive reduces your available pension exclusion dollar-for-dollar. This means higher Social Security can actually increase the state tax on your other retirement income. For a deeper explanation of how this offset works, see our complete guide to Maryland’s senior tax benefits.

Are Pensions and 401(k) Distributions Taxed in Maryland?

Yes, but Maryland offers a pension exclusion that can shelter up to $41,200 (2025) of qualifying income from state taxation. This exclusion applies only to distributions from qualified employer retirement plans: 401(k)s, 403(b)s, 457(b)s, and defined benefit pensions. It does not apply to IRA distributions of any kind.

The maximum exclusion is reduced dollar-for-dollar by your Social Security and Railroad Retirement benefits. So if you receive $35,000 in Social Security, your available pension exclusion drops to $6,200. Once Social Security exceeds roughly $41,200, the pension exclusion is effectively eliminated.

To qualify, you must be 65 or older (or totally disabled) by December 31 of the tax year. Unlike the senior tax credit, there is no income ceiling — even high-income retirees can use the pension exclusion, subject to the Social Security offset.

For worked examples, calculation worksheets, and the full breakdown of how the pension exclusion interacts with the senior tax credit, see our Maryland Senior Tax Credit guide.

Are Traditional IRA Distributions Taxed in Maryland?

Yes — and this is the single most expensive mistake we see Maryland retirees make. Traditional IRA withdrawals are fully taxable in Maryland and are not eligible for the pension exclusion. This includes rollover IRAs, SEP-IRAs, and SIMPLE IRAs.

The planning implication is significant: rolling a 401(k) into a traditional IRA for “consolidation” eliminates your eligibility for the pension exclusion. Depending on your Social Security amount, this can cost $500–$2,369 per year in additional state taxes — or $20,000–50,000+ over a 20-year retirement.

Roth IRA qualified distributions, by contrast, are completely tax-free in Maryland and do not count toward your federal adjusted gross income (FAGI). This makes Roth withdrawals a powerful tool for managing your income around the senior credit thresholds. For more on how Roth timing fits into your Maryland tax picture, see our Roth IRA 5-Year Rule guide.

Are Military Pensions Taxed in Maryland?

Maryland provides a separate exclusion for military retirement income. All military retirees can subtract up to $12,500 from their military pension income. For retirees age 55 and older, the exclusion increases to $20,000.

This military exclusion is separate from — and in addition to — the general pension exclusion. A military retiree who also receives a 401(k) distribution could potentially benefit from both, subject to the respective rules and the Social Security offset on the general pension exclusion.

What Is the Maryland Senior Tax Credit?

In addition to the pension exclusion, Maryland offers a nonrefundable tax credit of up to $1,750 for residents age 65 and older — regardless of whether they’re retired or what type of income they have. The credit is based on your age, residency, and federal adjusted gross income (FAGI), with hard cutoffs at $100,000 (single) and $150,000 (joint).

This credit is one of the most frequently missed benefits we see. Many eligible Marylanders assume “retirement tax credit” means you need to be retired. You don’t. For example, if you’re 67 and still working part-time with $85,000 in income, you qualify.

We’ve written a comprehensive guide to the senior tax credit, including eligibility rules, FAGI management strategies, the 401(k)-to-IRA rollover decision, and worked examples: Maryland Senior Tax Credit: How to Save Up to $1,750 on Your State Taxes.

What About Investment Income, Rental Income, and Annuities?

Investment income (dividends, interest, capital gains), rental property income, and most annuity payments are fully taxable in Maryland at normal state rates. There is no special exclusion for these income types.

Some qualified annuity payments from employer plans may be eligible for the pension exclusion, but non-qualified annuity distributions are not. If you’re unsure which category your annuity falls into, check whether it was funded through an employer plan under IRC §401(a), §403, or §457(b).

For retirees with significant investment income or capital gains, Maryland’s 2025 tax law changes added a 2% capital gains surtax for taxpayers with FAGI above $350,000. We cover this and other changes in the section below.

What Changed in Maryland’s 2025 Tax Law?

The Budget Reconciliation and Financing Act of 2025 made several changes affecting Maryland retirees, particularly those with higher incomes:

• Two new state income tax brackets: 6.25% on income above $500,001 ($600,001 joint) and 6.50% on income above $1,000,001 ($1,200,001 joint). Most retirees remain in the 5.75% top bracket.
• 2% capital gains surtax: Applies to taxpayers with FAGI above $350,000 who have capital gains. This can catch retirees selling appreciated assets.
• Reduction in itemized deductions: Itemized deductions are reduced by 7.5% of FAGI above $200,000.
• Higher standard deduction: Increased to $3,350 (individual) / $6,700 (joint), now indexed to cost-of-living.
• Local income tax cap raised to 3.30%: Up from 3.20%, giving counties more leeway to raise local tax rates.

These changes don’t directly affect the pension exclusion or senior credit, but they alter the broader tax landscape — particularly for retirees managing capital gains or evaluating large Roth conversions.

Does Maryland Have Estate and Inheritance Taxes?

Yes — and Maryland is one of only a handful of states that impose both. This matters for retirement planning because it affects how much of your wealth passes to your heirs.

• Estate tax: Applies to estates valued over $5 million per individual, $10 million per married couple (as of 2026), with rates up to 16%.
• Inheritance tax: A flat 10% rate on inherited assets, but immediate family members (spouse, children, grandchildren, parents, siblings) are exempt.

If your estate is near the $5 million threshold, or if you have beneficiaries outside the immediate-family exemption, Maryland-specific estate planning becomes important. Strategies like lifetime gifting, Roth conversions (which reduce the taxable estate by the tax paid), and proper beneficiary designations can significantly reduce the combined estate and inheritance tax burden.

Is Maryland Tax-Friendly for Retirees?

It’s a mixed picture. Maryland is more retirement-friendly than many Northeastern states, but less favorable than states with no income tax like Florida or Texas. The Social Security exemption and pension exclusion are genuinely valuable — a couple with moderate income from employer plans and Social Security can reduce their state tax bill by 50–70% or more. But the presence of both estate and inheritance taxes, full taxation of IRA distributions, and the hard FAGI cutoffs on the senior credit mean that planning matters significantly.

The retirees who do best in Maryland are those who understand which accounts their income comes from, manage their FAGI around the credit thresholds, and make informed decisions about 401(k)-to-IRA rollovers before it’s too late.

What Should You Do Next?

If you’re approaching or already in retirement in Maryland, three steps will tell you where you stand:

1. Review your most recent Maryland Form 502. Check Line 10a (pension exclusion) and Line 32 (senior tax credit). If either is blank and you think you might qualify, you may have missed benefits — and you can amend Maryland returns for up to three years.
2. Audit your retirement account structure. List which accounts are qualified employer plans (401(k), 403(b), pension) vs. IRAs. This determines whether the pension exclusion applies to your distributions.
3. Estimate your FAGI relative to the senior credit thresholds. If you’re near $100,000 (single) or $150,000 (joint), small adjustments — using Roth withdrawals, QCDs, or income timing — could preserve a $1,000–$1,750 annual credit.

For the full playbook on maximizing all three Maryland tax benefits — including worked examples, the 401(k) vs. IRA decision framework, and FAGI management strategies — read our complete Maryland Senior Tax Credit guide.

Go Deeper: Related Guides

• Maryland Senior Tax Credit: How to Save Up to $1,750 — Full guide to the pension exclusion, senior credit, and planning strategies.
• Required Minimum Distributions (RMDs) — How RMDs interact with Maryland tax planning.
• Navigating IRMAA: Medicare Premium Surcharges — How income management affects both state taxes and Medicare costs.
• The Widow Penalty — How a spouse’s death changes the Maryland tax picture.
• Roth IRA 5-Year Rule Explained — Tax-free Roth distributions and their role in FAGI management.

Work With a Maryland Retirement Tax Specialist

Maryland’s tax benefits for retirees are generous, but the rules are interconnected in ways that aren’t obvious from any single tax form or document. The families we work with appreciate having someone who can see the full picture — not just prepare a return in April, but help structure accounts and income throughout the year to minimize lifetime taxes.

In a brief introductory call, we can review whether you’re claiming both the pension exclusion and the senior credit, identify account structure decisions that may be costing you money, and show how Maryland tax planning fits into your broader retirement income strategy. Schedule an introductory call here.