State Income Tax on 401(k) Rollovers: 2026 State-by-State Guide

The short answer for most people: a traditional 401(k) rolled to a traditional IRA is tax-free everywhere — federally and at the state level. State taxes become material in exactly two situations: a Roth conversion (intentionally taxable) and a failed indirect rollover (accidentally taxable). This guide covers both, with a state-by-state breakdown of who taxes Roth conversions and at what marginal rate.

Why direct rollovers are state-tax-free everywhere

A direct rollover — where your old plan sends funds directly to the new custodian, never passing through your hands — is excluded from gross income under IRC § 402(c). It's not a distribution; it doesn't appear on Line 5a of your federal Form 1040 as pension income. Since state income taxes are calculated starting from federal adjusted gross income (or federal taxable income) in most states, a transaction that never enters your federal income base never enters your state income base either.

The same logic applies to a Roth 401(k) rolled directly to a Roth IRA. Your basis carries over; no income is recognized; no state tax applies.¹

Where this breaks down: if you take an indirect rollover — the plan cuts you a check, withholds ailing 20%, and you have 60 days to redeposit the full amount including the withholding — a failure to complete the redeposit creates a taxable distribution. That distribution is includable in federal and state income, and may trigger early-distribution penalties if you're under 59½. See the direct vs. indirect rollover guide for details on avoiding this trap.

When state taxes apply to a 401(k) rollover

Three situations trigger state income tax in connection with a 401(k) rollover:

1. Roth conversion. Converting pre-tax 401(k) money to a Roth IRA is a deliberately taxable event. The converted amount is ordinary income at the federal level under IRC § 408A(d)(3). Most states include that income in state taxable income at the state's marginal rate.
2. Failed indirect rollover. If you receive a check and don't redeposit within 60 days, the IRS treats the full pre-withholding amount as a distribution. Your state does too. Plus a 10% federal penalty (2.5% additional CA penalty) if you're under 59½.
3. Cash-out or early distribution. Taking your 401(k) as cash rather than rolling it is immediately taxable federally and in most states. The 10% federal penalty applies if you're under 59½, and some states add their own penalty.

The table below shows how states treat situation #1 — Roth conversions — since that's where most planning decisions happen.

No-income-tax states: zero state tax on any conversion

Nine states impose no state income tax at all. Residents of these states owe nothing at the state level on Roth conversions, early distributions, or any other retirement income event. Federal tax still applies normally.

Residents of these states owe nothing to their state on a Roth conversion, regardless of size. A married couple in Texas converting $300,000 in a single year pays only the federal income tax on that amount.

States that exempt retirement income from state tax

Several states impose income tax generally but carve out retirement income — including 401(k) distributions and, in some cases, Roth conversions — from the taxable base. The two most notable are Illinois and Pennsylvania.

Illinois

Illinois imposes a 4.95% flat income tax but exempts all qualified retirement income from that tax. "Qualified retirement income" includes distributions from 401(k) plans, 403(b) plans, 457(b) governmental plans, IRAs, pensions, and Social Security.³

The practical result: a Roth conversion that adds $200,000 to your federal taxable income adds zero to your Illinois taxable income. You pay only federal rates on the conversion — Illinois gets nothing.

This makes Illinois one of the best states in the country for large Roth conversions despite having a positive income tax rate. The exemption covers the converted amount regardless of your age or income level.

Pennsylvania

Pennsylvania imposes a flat 3.07% income tax but does not tax most retirement distributions after the participant reaches retirement age (generally defined as age 59½ under the state's rules).⁴ This includes 401(k) and IRA distributions taken after retirement age.

For Roth conversions specifically: Pennsylvania uses its own income classification system that differs from federal treatment. A Roth conversion that triggers federal ordinary income typically does not trigger Pennsylvania income tax, because PA treats the transaction as a non-taxable recovery of previously taxed cost basis rather than new income.

Early distributions before 59½: Pennsylvania may treat pre-retirement distributions from a 401(k) as compensation income, which would be taxable at 3.07%. This is a critical distinction from federal treatment: while federal law has the 10% penalty for early distributions, PA has no penalty — but it taxes the distribution as ordinary compensation income.

Mississippi and Alabama

Mississippi exempts distributions from qualified retirement plans from state income tax. Alabama exempts many pension and retirement distributions, though the specifics differ from federal rules and vary by plan type. If you're a resident of either state and are planning a large Roth conversion, confirm the current exclusion rules with your state's department of revenue or a tax professional before executing.

High-tax states: what a Roth conversion actually costs

Most states tax Roth conversions at their standard marginal income tax rates. For residents of high-tax states, this significantly changes the math on whether a conversion makes sense.

A married couple in California converting $200,000 in a year where they're already in the 9.3% state bracket pays roughly $18,600 in California state income tax on the conversion — on top of the federal tax. In Texas, Florida, or Washington, they pay only the federal cost. That gap of $18,600 often determines whether the conversion math works for a given household.

California: the extra 2.5% early distribution penalty

California is the only major state that imposes its own early distribution penalty on top of the federal 10% penalty. Under California Revenue and Taxation Code, distributions taken before age 59½ from qualified retirement plans (including 401(k)s and IRAs) are subject to an additional 2.5% penalty, calculated via FTB Form 3805P.²

The combined early-distribution penalty for a California resident under 59½: 12.5% (10% federal + 2.5% California), before considering income tax.

What triggers it:

• Cash-out or distribution before 59½
• A failed indirect rollover (missed 60-day window, resulting in a deemed distribution)
• A Roth conversion done via distribution rather than direct rollover, before 59½

What doesn't trigger it:

• A direct rollover from 401(k) to traditional IRA (not a distribution)
• A direct rollover from Roth 401(k) to Roth IRA (not a distribution)
• Distributions that qualify for an exception under California's own rules (California recognizes most but not all federal exceptions — verify via Form 3805P instructions)

California residents planning large Roth conversions before 59½ face an especially high cost: state income tax up to 13.3% plus the 2.5% penalty. Conversion before 59½ in California is almost never the right move unless your marginal rate will be dramatically higher later.

New York: the $20,000 exclusion and its limits

New York allows a subtraction of up to $20,000 of pension and annuity income per person ($40,000 for married filing jointly) for taxpayers age 59½ or older.⁵ This reduces — but does not eliminate — state tax on retirement distributions.

Important limits on the NY pension exclusion:

• The exclusion applies to distributions that are included in federal gross income. A direct rollover to a traditional IRA doesn't enter federal gross income, so there's nothing to exclude — it was already tax-free.
• For a Roth conversion of $150,000 at age 62, only $20,000 can be subtracted. The remaining $130,000 is taxable at New York rates — up to 6.85% at higher income levels, up to 10.9% at the highest brackets.
• New York City residents pay additional city income tax up to 3.876% on top of state rates. Combined state + city marginal rate for NYC high earners exceeds 14% — approaching California territory.

For New York residents doing multi-year Roth conversion strategies, the $20,000 annual exclusion provides modest relief but doesn't change the fundamental math. A fee-only advisor can help you model whether the conversion math works at New York's effective rate versus your projected future federal rate.

Strategic relocation before a large Roth conversion

For high-income households sitting on large pre-tax 401(k) balances, relocating to a no-income-tax state before executing Roth conversions can save tens of thousands of dollars. This is a legitimate and increasingly common planning strategy — not avoidance, just geography.

The math on a $1M pre-tax 401(k) converted over 10 years, $100K per year:

The relocation strategy requires genuine change of domicile — California and New York are aggressive about auditing claimed relocations, especially for high earners. Factors they examine include where you spend your days, where you vote, where your doctor and accountant are, and where your children go to school. A move that saves $93,000 in state tax is worth doing correctly and completely.

A fee-only financial advisor familiar with your state's domicile audit standards can help you document the move properly and time conversions relative to your actual move date.

Three scenarios

Scenario 1: California couple, $850K pre-tax 401(k), planning early retirement at 58

They want to convert $120,000/year during their income-gap years (ages 58–63) before Social Security and RMDs. At California's 9.3% state marginal rate, each conversion adds $11,160 in state taxes beyond the federal cost. They're also under 59½ for the first year — triggering the 2.5% CA penalty on conversions structured as distributions. Total friction: federal + CA income tax + CA penalty for the first year. A fee-only advisor models whether delaying the conversion start to age 59½ and/or converting from inside the 401(k) via in-plan Roth conversion (no distribution = no CA penalty) changes the math materially.

Scenario 2: Pennsylvania couple, $1.3M pre-tax 401(k), retiring at 65

They plan to convert $80,000/year for 10 years before RMDs begin. Federal cost: ordinary income tax on each $80K conversion. Pennsylvania cost: $0 — PA doesn't tax post-59½ retirement distributions. They execute $800,000 in Roth conversions over the decade and owe no Pennsylvania state income tax on any of it. Illinois would offer the same result. They still owe full federal income tax; the state-level savings are ~$24,640 over the 10-year window at PA's 3.07% rate (had it applied). That's not a relocation case — they're already in a favorable state.

Scenario 3: Oregon resident, $600K pre-tax 401(k), retiring at 62 and considering moving to Nevada

Oregon's top rate is 9.9%. On $60,000/year in planned conversions over 15 years, that's $89,100 in Oregon state taxes before considering federal brackets. A move to Nevada (no income tax) before conversions begin saves the full $89,100 at the state level. The key question is whether the total cost of relocation (housing prices, property taxes, quality of life) is offset by the tax savings. With $900,000 in total planned conversions, the 9.9% Oregon rate generates a legitimate relocation economics conversation. A fee-only advisor models the full scenario, including when the move has to happen relative to conversion start dates to ensure Oregon can't claw back the first year's conversions under Oregon's domicile rules.

1. IRS Topic 413: Rollovers from Retirement Plans — traditional 401(k) direct rollover to traditional IRA excluded from gross income under IRC § 402(c); most states follow federal income classification for this transaction.
2. California FTB: Early Distributions — California imposes an additional 2.5% penalty on early distributions from qualified retirement plans before age 59½ via Form 3805P; California does not conform to all federal exceptions.
3. Illinois Department of Revenue: Retirement Income Taxability — Illinois exempts pension, annuity, and retirement plan distributions from its 4.95% flat state income tax; qualified 401(k) and IRA distributions are fully excluded.
4. Pennsylvania Department of Revenue: Taxability of Retirement Income — PA does not tax most retirement distributions after the participant reaches retirement age; Roth conversions are generally not taxable at the Pennsylvania level.
5. New York State Department of Taxation and Finance: Information for Retired Persons — $20,000 pension and annuity income subtraction per person for taxpayers age 59½ or older; rules on qualifying distributions.
6. Tax Foundation: 2026 State Income Tax Rates and Brackets — comprehensive table of state marginal income tax rates for 2026 by state.

State tax rules verified against state department of revenue sources and Tax Foundation data as of July 2026. State income tax law changes frequently — always verify current rules before executing a large Roth conversion strategy.