Colorado is one of the friendlier states for retirees. It lets people 65 and older subtract their Social Security in full and shield up to $24,000 of other retirement income. The Colorado retirement income tax then applies a flat rate to whatever is left.
This guide explains the pension subtraction, the Social Security rules, and how the flat rate ties it all together.
Colorado Retirement Income Tax at a Glance
Here is how Colorado treats each common source of retirement money.
| Income source | How Colorado treats it |
|---|---|
| Social Security | Fully subtracted for those 65+; does not count against the pension cap. |
| Pensions and annuities | Subtraction up to $24,000 (65+) or $20,000 (55 to 64). |
| IRA and 401(k) withdrawals | Eligible for the same pension and annuity subtraction. |
| Senior exclusion | Pension/annuity subtraction: $24,000 if 65+, $20,000 if 55 to 64. |
Colorado's approach is built around one generous subtraction that covers most kinds of retirement income, plus separate, full relief for Social Security. The combination makes Colorado a comparatively light-tax state for retirees, especially those 65 and older.
The flat rate is the other half of the picture. Whatever income is not subtracted is taxed at a single low percentage, with no climbing brackets.
Colorado Retirement Income Tax: How It Works
Colorado has a flat income tax. The statutory rate is 4.4%, temporarily reduced to 4.25% for tax year 2024 under a TABOR refund mechanism. Every dollar of taxable income is taxed at that single rate, so a large withdrawal is taxed at the same percentage as a small one.
The centerpiece for retirees is the pension and annuity subtraction. If you are 65 or older, you can subtract up to $24,000 of pension, annuity, IRA, and 401(k) income. If you are 55 to 64, you can subtract up to $20,000. The subtraction shields that income from the flat rate entirely.
That subtraction is broad. It is not limited to traditional pensions; it covers annuity, IRA, and 401(k) distributions too. So a 67-year-old pulling $20,000 from an IRA to cover care can subtract all of it and owe no Colorado tax on that withdrawal, as long as the total stays within the $24,000 cap.
Social Security Gets Separate, Full Relief
Colorado treats Social Security even better. Taxpayers 65 and older may subtract the entire amount of their federally taxed Social Security benefits. Whatever the IRS taxed federally, Colorado subtracts back out for those 65 and up.
Two details make this especially valuable. First, the Social Security subtraction is separate from the pension cap. Social Security amounts do not count against the $24,000 or $20,000 limit. So your Social Security does not eat into your pension subtraction the way it does in some other states.
Second, the relief is expanding. Starting in 2025, Social Security becomes fully deductible for those ages 55 to 64 as well, subject to income limits. So younger retirees are gaining the same full Social Security break the 65-and-older group already has.
Put together, a 65-or-older Coloradan can often subtract all of their Social Security and up to $24,000 of other retirement income, then pay the flat rate only on whatever remains. For many retirees, that leaves a small Colorado tax bill or none at all.
What This Means for Paying for Care
If you are drawing on retirement savings to pay for senior care, Colorado's rules work in your favor, up to a point.
A withdrawal that fits inside your pension and annuity subtraction is shielded from Colorado tax entirely. If you are 65 or older, the first $24,000 of pension, IRA, and 401(k) income each year can come out free of state tax. That is real relief when care costs force larger withdrawals.
The catch is the cap. Income above $24,000 (or $20,000 for the younger band) is taxed at the flat rate. A big one-time withdrawal to cover a year of care can blow past the subtraction, leaving the excess taxable. Spreading withdrawals across years keeps more of each year's draw inside the cap.
There is also a federal layer the Colorado subtraction does not touch. A large withdrawal still raises your federal taxable income, which can lift your federal tax and your Medicare premiums two years out. So even when Colorado shields a withdrawal, the federal side may not. That is one more reason to keep annual draws steady rather than lumpy, and to plan the withdrawal schedule before care costs force your hand.
For the federal mechanics of these withdrawals, including the early-withdrawal penalty and required distributions, see our guide to using retirement accounts for care. To sequence your income sources so each year's withdrawal stays within the subtraction, see building a senior care funding plan. If you are just starting to map the money, begin with how to pay for senior care.
A tax professional can confirm how much of your withdrawal the subtraction will cover. The Colorado Department of Revenue provides the worksheet that runs the calculation.
Where Colorado Stands for Retirees
Colorado ranks among the friendlier states for retirees. The full Social Security subtraction for those 65 and older, combined with a broad $24,000 pension and annuity subtraction and a low flat rate, keeps many retirees' state tax modest.
The design favors the typical retiree well. Social Security comes out free, a healthy slice of other retirement income is subtracted, and the flat rate on the remainder is among the lower state rates in the country. The expansion of the Social Security subtraction to the 55-to-64 band makes Colorado friendlier still for early retirees.
The limit is the subtraction cap. A retiree drawing well above $24,000 a year from taxable accounts will pay the flat rate on the excess. For high-withdrawal retirees, Colorado is still reasonable but no longer nearly tax-free.
The takeaway: for most retirees living on Social Security and moderate withdrawals, Colorado is a light-tax state. Keep your annual draw near the subtraction cap and your Colorado tax stays small.
Frequently Asked Questions
For those 65 and older, no in practice. Colorado lets taxpayers 65 and older subtract the full amount of their federally taxed Social Security. Starting in 2025, the full subtraction also reaches those 55 to 64 under income limits.
Up to $24,000 if you are 65 or older, or up to $20,000 if you are 55 to 64. The subtraction covers pension, annuity, IRA, and 401(k) income, and Social Security does not count against the cap.
A flat 4.4% statutory rate, reduced to 4.25% for tax year 2024 under a TABOR refund mechanism. Taxable retirement income above your subtraction is taxed at that single rate.
They are eligible for the pension and annuity subtraction. If you are 65 or older, up to $24,000 of that income can be subtracted; anything above the cap is taxed at the flat rate.
Learn More
- How to Pay for Senior Care
- Building a Senior Care Funding Plan
- Using Retirement Accounts to Pay for Care
Find personalized help planning how to pay for senior care at brevy.com.
The information on Brevy.com is for educational purposes only and is not a substitute for professional legal, financial, or medical advice. Rules vary by state and program and change frequently. Always verify with the relevant agency or a qualified professional. Brevy is not a law firm, financial advisor, or healthcare provider.