How Pennsylvania taxes retirement income

Some 2026 figures pending confirmation Tax year 2026 · research last updated October 2, 2026

Pennsylvania doesn't tax Social Security benefits.
Exclusions and subtractions for retirement income (details below):
- Retirement benefits from an eligible employer-sponsored plan after retirement.
- IRA (traditional and Roth) distributions at or after age 59½: from age 59½.
Rates for 2026: 3.07% flat rate.

At a glance

Income tax	Yes
Rates (2026)	3.07% flat rate
Starts from	Its own definition of income (not the federal return)
Social Security	Not taxed
Retirement income exclusions	2 (see below)
Roth conversions	Generally not taxed (see below)
Capital gains	Special treatment (see below)
Local income tax	Yes, in some places (see below)

Pennsylvania doesn't tax Social Security benefits.

Social Security and Railroad Retirement benefits are not PA taxable income and are also excluded from Tax Forgiveness eligibility income.

Pensions, IRAs and 401(k)s

Retirement benefits from an eligible employer-sponsored plan after retirement

Applies to: pensions, 401(k) distributions, 403b, 457

Payments from an eligible (written, retirement-purpose) employer-sponsored plan received after the employee meets the plan's retirement age or years-of-service conditions AND retires are fully exempt. Distributions before retirement conditions are met are taxable as compensation to the extent they exceed previously PA-taxed employee contributions (cost recovery method: basis comes out first). All SERS, PSERS, PMRS and U.S. Civil Service disability plan distributions are exempt regardless of code. Early-retirement incentive payments are taxable compensation.

IRA (traditional and Roth) distributions at or after age 59½

Age: 59½+ · Applies to: IRA distributions, roth ira, SEP plans

IRA distributions (including lump sums) received on or after reaching age 59½, or paid to a beneficiary/estate because of death, are fully exempt. Before 59½ they are taxable to the extent they exceed previously PA-taxed contributions (cost recovery), even if a federal penalty exception applies (e.g., 72(t) substantially equal payments) — except that the Department treats a non-penalized distribution after retirement/disability/death/separation as exempt (PIT Guide). Distributions are exempt regardless of amount; no cap.

Roth conversions

Pennsylvania generally doesn't tax Roth conversions; the conditions are in the rules above.

A traditional-to-Roth conversion is not PA-taxable when done as a direct trustee-to-trustee transfer or when 100% of the distribution (including any federal tax withheld) is deposited into the Roth within 60 days. Any amount not moved into the Roth (e.g., federal withholding kept) is taxable only to the extent it exceeds the IRA's remaining PA basis (prior contributions) — and is exempt anyway if the owner is 59½+ under the general IRA rule. PA also does not tax contributions' growth inside the IRA.

Capital gains

Taxed at 3.07% in the separate 'net gains' class (PA-40 line 5), computed with PA basis rules; net losses in the class cannot offset other classes and are not carried forward. Gain on sale of a principal residence is excluded under PA's own rule. Gains on direct U.S./PA obligations are exempt. Capital gain distributions from mutual funds are reported as dividends (line 3).

Credits and relief for older residents

Tax Forgiveness (PA Schedule SP, PA-40 line 21). Credit of 100% down to 10% of PA tax based on 'eligibility income' = PA taxable income + many nontaxable items (tax-exempt interest, nontaxable gains, gifts, inheritances, insurance proceeds, alimony, etc.) but EXCLUDING Social Security/RRB and retirement benefits from PA-eligible plans after retiring. 2025 Table 1 (unmarried, no dependents): 100% if eligibility income <= $6,500, then 90% <= $6,750 ... 10% <= $8,750 (steps of $250), none above. Table 2 (married, even filing separately, joint eligibility income): 100% <= $13,000, stepping 10% per $250 to 10% <= $15,250. Each dependent child adds $9,500. Income limit: Eligibility income <= $8,750 single / $15,250 married (no dependents)

Local income taxes

Most PA municipalities/school districts levy an Earned Income Tax (EIT) on wages and net profits only (typically ~1%-3.8%); retirement income, IRA distributions, Social Security, interest, dividends and capital gains are NOT subject to EIT. Philadelphia: the Wage/Net Profits tax likewise excludes retirement income, but residents owe the School Income Tax (SIT) on certain unearned income (dividends, some interest, short-term capital gains, some rents, some annuities, S-corp/limited partnership income, etc.). SIT rate 3.74% for 2025, 3.735% for tax year 2026 (per City of Philadelphia). Some school districts in PA (outside Philadelphia) do not tax unearned income.

More detail from our research notes

Commercial annuities (not part of an employer plan) are taxable as INTEREST to the extent federally taxable (1099-R code 7D/Box 8). Interest on U.S. obligations and PA/PA-municipal obligations is exempt; interest on other states' bonds is taxable. Employee contributions to retirement plans were PA-taxed going in, which is why distributions of basis are tax-free. Filing status matters little (flat rate) except for Tax Forgiveness and class-by-class loss rules. The 3.07% rate has been unchanged since 2004 and is statutory (72 P.S. §7302).

Pending confirmation

These points were still being confirmed against Pennsylvania's published 2026 forms when this page was built. Most are waiting on forms the state publishes around the turn of the year.

5 items

2026 PA-40 instructions not yet published (expected Jan 2027, https://www.pa.gov/agencies/revenue/forms-and-publications); rate 3.07% unchanged for 2026: the 2025-26 budget (signed Nov 12 2025) added only the Working Pennsylvanians Tax Credit (10% of the federal EITC, on the PA-40 from TY2026; wage earners only) and the 2026-27 budget made no PIT change (PA Chamber recap, secondary).
2026 Tax Forgiveness eligibility thresholds assumed equal to 2025 ($6,500 / $13,000 base, +$9,500 per dependent, $250 steps) - these are statutory but confirm on the 2026 Schedule SP (Jan 2027).
Philadelphia SIT TY2026 rate not published. The resident Wage Tax is 3.735% from July 1 2026 (3.74% from July 1 2025) per phila.gov ; the SIT page lists only 2021-2025 (2025: 3.74%). The 3.735% SIT figure for 2026 is an inference; confirm on the 2026 SIT return instructions (early 2027). Not modeled by Taxtirement. Exact list of SIT-taxable unearned income not re-read from the SIT regulations.
IRA distributions after retirement but before 59½ without a federal penalty: the PA-40 instructions say they are taxable (cost recovery) while the PIT Guide says non-penalized distributions after retirement/separation are exempt — conflicting; for planning, treat pre-59½ IRA withdrawals as taxable above basis.
Whether a PA household that moved from another state (IRA contributions never PA-taxed) is treated differently on IRA distributions/conversions — PA rules still exempt 59½+ distributions, but the cost-basis for pre-59½ amounts would be zero; not researched further.

Sources

Every figure comes from these documents, mostly the state's own forms, instructions and statutes.

2025 PA-40 instructions: 3.07% rate, eligible plan/IRA distribution rules (59½), Roth rollover/conversion treatment, 1099-R code guidance, commercial annuities as interest, Schedule SP Tax Forgiveness eligibility income and tableshttps://www.pa.gov/content/dam/copapwp-pagov/en/revenue/documents/formsandpublications/formsforindividuals/pit/documents/2025/2025_pa-40in.pdf
PA Personal Income Tax Guide — Gross Compensation (DSM-12, 08-2025): eligible retirement plans, IRA qualifying age = no federal early-withdrawal penalty (59½), cost recovery, 1099-R reconciliation tablehttps://www.pa.gov/content/dam/copapwp-pagov/en/revenue/documents/formsandpublications/papersonalincometaxguide/documents/pitguide_grosscompensation.pdf
Philadelphia School Income Tax (2026 rate, taxable unearned income types)https://www.phila.gov/services/payments-assistance-taxes/taxes/income-taxes/school-income-tax/
Philadelphia Wage Tax rates (resident 3.735% from July 1 2026, 3.74% from July 1 2025)https://www.phila.gov/services/payments-assistance-taxes/business-taxes/wage-tax-employers/
(secondary) PA Chamber 2026-27 State Budget Recap: tax changes are CNIT phase-down, Philadelphia BPT decoupling, local sales tax situs; no personal income tax changehttps://www.pachamber.org/wp-content/uploads/2026/07/2026-27-State-Budget-Recap.pdf

Taxtirement's Pennsylvania calculation is also checked against a second, independent implementation on 1,000 random households. How we check our numbers.

See your own years. Taxtirement applies these Pennsylvania rules, and the federal and Medicare rules, to your household for every year of retirement, and shows the calculation behind each number. Coming November 2026 for iPhone, iPad and Mac.

This page summarizes Pennsylvania's 2026 rules as Taxtirement applies them, for education and planning. It isn't tax advice, and it doesn't cover every situation (for example part-year residents, businesses or military-only provisions). Rules change; check the state's current instructions, or a tax professional, before you act. Spotted something wrong? Tell us.