Short answer: there is no special exemption for retirement income under Washington’s new income tax. If your retirement distributions push your total household income above $1 million, they’re taxed at 9.9% — just like wages, investment income, or any other component of federal adjusted gross income.
That said, the $1 million standard deduction means this tax will not affect the vast majority of Washington retirees. Here’s how the statute actually works for each type of retirement income, and who needs to pay attention.
(For an overview of ESSB 6346, see Washington’s New Income Tax: What Founders, Investors, Athletes, and High Earners Need to Know. For the full tax landscape, see Washington State Taxes.)
How ESSB 6346 Treats Retirement Income
Washington’s new income tax starts with federal adjusted gross income (§101(3)). The statute then applies specific modifications in Sections 302 through 308 — removing long-term capital gains (which are taxed separately under the capital gains tax), adding back certain items like state tax deductions, and adjusting for pass-through entity payments.
Here’s what the statute does not do: it does not exclude retirement income. There is no modification in §§302–8 for IRA distributions, 401(k) withdrawals, pension payments, or annuity income. If these amounts are included in your federal AGI — and they almost always are — they flow directly into Washington base income.
The result is straightforward: retirement income is treated the same as any other income under ESSB 6346. It counts toward the $1 million threshold, and any amount above that threshold is taxed at 9.9%.
Social Security Benefits
Social Security benefits receive partial protection — but it comes from the federal tax treatment, not from Washington.
At the federal level, Social Security benefits are included in AGI at 0%, 50%, or 85%, depending on your “provisional income” (essentially, your other income plus half of your Social Security benefits). Most high-income recipients have 85% of their benefits included in federal AGI.
Because ESSB 6346 starts with federal AGI, Washington taxes only the portion of Social Security benefits that the federal government includes in AGI. If your provisional income is low enough that none of your Social Security is federally taxable, none of it enters the Washington tax base either.
But for anyone whose total income (including Social Security) exceeds $1 million, the 85% inclusion at the federal level means that 85% of Social Security benefits are also included in Washington base income. At that income level, every dollar of Social Security that flows through federal AGI gets taxed at 9.9%.
The practical reality: Social Security benefits max out at approximately $59,000 per year in 2026. Even at 85% inclusion, that’s roughly $50,000 added to AGI. Social Security alone will never push someone over the $1 million threshold — but it does add to the pile for someone who’s already close.
Traditional IRA and 401(k) Distributions
Distributions from traditional IRAs and 401(k) plans are fully included in federal AGI (except for any nondeductible basis in the case of IRAs). Under ESSB 6346, these distributions flow directly into Washington base income with no modification.
This matters most in three scenarios:
Required minimum distributions (RMDs). Starting at age 73 (or 75 for those born after 1960), the IRS requires withdrawals from traditional retirement accounts. For someone with a large traditional IRA — say $10 million accumulated over a career — RMDs alone can exceed $400,000 per year. Combined with other income sources (Social Security, pensions, investment income), this can push total AGI well above $1 million.
Lump-sum distributions. A retiree who takes a large one-time distribution — to buy a home, fund a grandchild’s education, or simply rebalance — could spike their AGI above $1 million for that year even if their normal annual income is well below the threshold. The Washington tax has no income averaging or smoothing mechanism.
Roth conversions. Converting a traditional IRA to a Roth IRA is a taxable event at the federal level — the converted amount is included in AGI. A $500,000 Roth conversion added to $600,000 of other income creates $1.1 million in AGI, triggering $9,900 in Washington tax on the conversion alone. This has major implications for pre-2028 planning (more on this below).
Roth IRA and Roth 401(k) Distributions
Qualified distributions from Roth accounts are not included in federal AGI. Because ESSB 6346 starts with federal AGI, Roth distributions are excluded from Washington base income entirely.
This is not a Washington-specific exclusion — it’s simply a consequence of how Roth accounts work at the federal level. But it creates a significant planning opportunity: money that has already been converted to Roth accounts (and has satisfied the five-year holding period) can be withdrawn tax-free for both federal and Washington purposes, regardless of amount.
A retiree withdrawing $2 million from a Roth IRA owes nothing to Washington on that distribution. The same $2 million from a traditional IRA would generate $99,000 in Washington tax (9.9% × $1 million above the threshold).
Pension Income
Pension payments from defined benefit plans — including state government pensions, corporate pensions, and military retirement pay — are generally fully included in federal AGI and therefore flow into Washington base income.
Federal pension protection. Federal law (4 U.S.C. §114) prohibits states from taxing the retirement income of nonresidents. This means that if you retire and leave Washington, the state cannot tax your pension regardless of where you earned it. But if you remain a Washington resident, your pension income is included in your Washington base income.
State government pensions. Washington state employees receiving PERS, TRS, LEOFF, or other state retirement system benefits will have those payments included in their Washington base income if they remain Washington residents. For most state retirees, the $1 million threshold means no tax will be owed. But a retired state employee with a large pension who also has significant investment income or other retirement accounts could be affected.
Military retirement pay. Like other pension income, military retirement pay is included in federal AGI and therefore in Washington base income. However, the same $1 million threshold applies — most military retirees will be well below it.
Annuity Payments
The taxable portion of annuity payments (the amount included in federal AGI after excluding the return of basis) flows into Washington base income. There is no Washington-specific exclusion for annuity income.
Who Actually Needs to Worry?
The $1 million standard deduction is the key protection for Washington retirees. To owe Washington income tax, a retiree’s total federal AGI must exceed $1 million (or $1 million combined for married couples — the marriage penalty applies here too; see The Marriage Penalty Explained).
Most retirees will never approach this threshold. But several profiles are at risk:
Retired tech executives with large traditional IRA and 401(k) balances from years of maxing out contributions, plus stock compensation that vested during their career. A $5 million traditional IRA at age 75 generates RMDs of roughly $200,000–$300,000 per year, and those numbers grow as the retiree ages.
Retired business owners who sold a business and rolled proceeds into traditional retirement accounts, or who receive ongoing pension or deferred compensation payments.
Retirees with significant investment portfolios generating dividend and interest income that, combined with retirement distributions, exceeds $1 million.
Anyone doing a large Roth conversion in a single year, especially if they have other income that puts them near the threshold.
Pre-2028 Planning: The Roth Conversion Window
The most important planning opportunity for Washington retirees is the window between now and January 1, 2028 — the effective date of the income tax.
Accelerate Roth conversions before 2028. Every dollar converted to a Roth account before 2028 is taxed at federal rates only (no Washington tax). After 2028, the same conversion would be taxed at federal rates plus 9.9% on amounts above $1 million. For someone planning to convert $3 million from a traditional IRA to a Roth, doing it in 2026 and 2027 instead of 2028 and 2029 saves approximately $198,000 in Washington state tax.
Spread conversions across 2026 and 2027. Converting $1.5 million in each of two years instead of $3 million in one year doesn’t save Washington tax (since there’s no Washington tax before 2028), but it can reduce the federal tax hit by keeping you in lower federal brackets.
Consider the five-year rule. Roth conversions have a five-year holding period before earnings can be withdrawn tax-free and penalty-free (if under age 59½). Conversions done in 2026 satisfy the five-year rule in 2031. For retirees over 59½, the five-year rule on earnings is less of a concern, but it’s still worth noting in your planning timeline.
Don’t over-convert. Roth conversions generate federal income tax. The goal is to convert enough to reduce future RMDs below the Washington threshold, but not so much that the federal tax bill in 2026–2027 exceeds the Washington tax you’d save. This requires modeling based on your specific account balances, expected investment returns, and projected income in retirement.
The Interaction with Washington’s Capital Gains Tax
Retirees with investment portfolios face an additional layer: Washington’s existing capital gains tax (chapter 82.87 RCW) taxes long-term capital gains above $250,000 at 7%, with gains above $1 million at 9.9%.
Under ESSB 6346 §302, long-term capital gains are stripped from Washington base income and replaced with the capital gains tax amount. This prevents double taxation — but it also means that retirees with both large retirement distributions and significant capital gains face two separate Washington taxes on different portions of their income.
Example: A retiree with $800,000 in traditional IRA distributions and $500,000 in long-term capital gains has $1.3 million in federal AGI. The capital gains are removed from Washington base income (§302) and taxed under the capital gains tax. The remaining $800,000 in Washington base income is below the $1 million threshold, so no income tax is owed on the retirement distributions. But the retiree still owes capital gains tax on the $500,000 gain (7% on $250,000 = $17,500, plus 9.9% on $250,000 = $24,750, total $42,250).
What About Federal Disaster Grants and Other Exclusions?
Section 308(e) of ESSB 6346 provides that any income exempted or preempted by federal or state law is excluded from Washington tax. This includes IRC §139D (Indian health programs) and other federally mandated exclusions. But standard retirement income — IRAs, 401(k)s, pensions — is not federally exempt from state taxation, so this provision doesn’t help.
The Bottom Line for Washington Retirees
Washington’s new income tax does not single out retirement income for special treatment — good or bad. Retirement distributions are simply part of federal AGI, which is the starting point for Washington base income. The $1 million standard deduction protects the vast majority of retirees, but those with large traditional retirement accounts, significant pension income, or plans for Roth conversions need to model the impact.
The single most valuable planning move for affected retirees: accelerate Roth conversions into 2026 and 2027, before the tax takes effect. Every dollar converted before 2028 permanently escapes Washington’s 9.9% rate.
Planning for retirement in light of Washington’s new income tax? Book a 20-minute intro call to discuss how ESSB 6346 affects your specific retirement accounts and timeline. Also see: Washington State Taxes Guide | Income Tax Planning Guide for High Earners.
