Updated October 16, 2026. Quick answer: North Carolina has no general retirement exclusion, and the D-401 instructions say the Bailey exclusion “does not apply to local government §457 plans” or “to §403(b) annuity plans”.
State retirement-income forms, line by line: North Carolina Schedule S.
North Carolina at a glance
| Item | What the documents say |
|---|---|
| How the state treats 403(b) and 457(b) withdrawals | Taxable unless the Bailey exclusion applies; it does not apply to local government 457 plans or 403(b) annuity plans, and reaches the state’s own 457 plans only for retirees who contributed before August 12, 1989 |
| Do the state’s documents name these plans? | The documents read name both 403(b) and 457 plans |
| Retirement exclusion or credit | Bailey settlement deduction for certain government retirees only; not for local government 457 or 403(b) annuity plans |
| Public-employee pension rule | Yes, but only for qualifying vested government retirees as of August 12, 1989 |
| Rate in the documents read | 4.25% for tax year 2025; 3.99% for taxable years after 2025 |
| Changed for 2026? | The rate is 3.99% for taxable years after 2025 |
What the North Carolina documents say
The North Carolina D-401 instructions describe the Bailey settlement deduction for retirees with five or more years of creditable service as of August 12, 1989 and say the exclusion does not apply to local government 457 plans or 403(b) annuity plans. The instructions give the rate: “For tax year 2025, the individual income tax rate is 4.25%”
For later years, the Department’s 2026 document says “the North Carolina individual income tax rate is 3.99% (0.0399)”.
Withholding and federal tax
Whether a state withholds is a separate rule: see state withholding on retirement withdrawals. Federal rules: 403(b) withdrawal rules and 457(b) withdrawal rules. The IRS says pension and annuity payments from a qualified employer plan have “all or some portion of the amounts you receive may be taxable”.
What the documents do not say
- The documents say “§457” and not “457(b)”; the page follows their wording.
- The instructions describe extending the exclusion to the state’s own 401(k) and 457 plans only for retirees who contributed before August 12, 1989.
Common mistakes
- Assuming North Carolina’s rule for a 401(k) or IRA also covers a 403(b) or 457(b): read whether its documents name the plan.
Related: whether North Carolina taxes 401(k) and IRA withdrawals, North Carolina retirement taxes, whether North Carolina taxes pensions, 403(b) withdrawal rules, 457(b) withdrawal rules, and state withholding on retirement withdrawals.
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Answer againSources
- North Carolina Individual Income Tax Instructions, Form D-401 (2025): https://www.ncdor.gov/2025-d-401-individual-income-tax-instructions/open
- Tax Rate Schedules: https://www.ncdor.gov/taxes-forms/individual-income-tax/tax-rate-schedules
- G.S. 105-153.7 Individual income tax imposed: https://www.ncleg.gov/EnactedLegislation/Statutes/HTML/BySection/Chapter_105/GS_105-153.7.html
- IRS Tax Topic 410, Pensions and annuities: https://www.irs.gov/taxtopics/tc410
Sources: the primary documents linked above, read on October 16, 2026. General information, not tax advice. Your own facts decide the outcome, and a tax professional or the state agency itself is the right place to confirm anything consequential.