Updated October 16, 2026. Quick answer: Colorado’s pension and annuity subtraction is for people 55 or older, but the Department of Revenue says someone under 55 who receives benefits because of a death may subtract up to $20,000, and only if the benefit is paid directly to the individual rather than through a trust or estate.
Colorado at a glance
| Item | What the documents say |
|---|---|
| How the state taxes retirement-account income | Taxed as income, with a pension and annuity subtraction |
| Do the state’s documents address beneficiaries? | Addressed for death benefits: an individual under 55 may subtract up to $20,000 of pension and annuity benefits received because of a death |
| Retirement exclusion or credit | Generally $20,000 a year, or $24,000 at age 65 or older, for people age 55 or older |
| Rate in the documents read | 4.4% |
| State inheritance or estate tax | Not mentioned in the documents read |
| Changed for 2026? | The publication (revised January 2025) does not mention 2026 and states no change to the IRA or pension subtraction |
What the Colorado documents say
The Department’s Income Tax Topics publication says “The subtraction is generally allowed only to individuals age 55 or older” and lists “certain IRA distributions reported on line 4b of the federal return” among qualifying income.
For death benefits it makes an exception: “the amount the individual may subtract is limited to $20,000” for someone under 55 who receives pension and annuity benefits because of the death of the person originally entitled to them. The benefit has to be paid directly to the individual. If it is paid to a trust, estate or other non-individual and then redistributed, “that income does not qualify for the subtraction”.
The 2025 booklet prints the rate: “The income tax rate is currently 4.4%”.
The federal 10-year rule and your Colorado tax year
IRS Publication 590-B says a beneficiary may be required to take the entire account balance by the “end of the 10th year following the year of the owner’s death”, with exceptions for certain beneficiaries. Because the balance generally has to come out within that window, the timing of each withdrawal decides which tax year it lands in. See the 10-year rule and annual RMDs, lump sum versus spreading withdrawals and inherited IRA rules.
Withholding and other state taxes
Whether a state withholds from a withdrawal is a separate rule: see state withholding on retirement withdrawals. For Colorado’s own death taxes, see Colorado inheritance tax.
What the documents do not say
- The publication does not use the words inherited IRA, and it does not say in terms that an IRA death distribution falls under the death-benefit rule.
- A trust or estate as beneficiary is outside the subtraction; whether your arrangement is paid directly to you is a question for the plan custodian and a Colorado preparer.
- They say nothing about a deduction or credit for estate tax or income in respect of a decedent.
Common mistakes
- Assuming Colorado’s rule for your own retirement income also covers an account you inherited: read whether its documents address beneficiaries, and confirm the point with a Colorado preparer.
Related: state tax on inherited IRA withdrawals, state by state, whether Colorado taxes 401(k) and IRA withdrawals, Colorado retirement taxes, Colorado inheritance tax, inherited IRA rules, spouse versus non-spouse beneficiary rules, and state withholding on retirement withdrawals.
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Answer againSources
- Income Tax Topics: Social Security, Pensions and Annuities (Revised January 2025): https://tax.colorado.gov/sites/tax/files/documents/ITT_Social_Security_Pensions_and_Annuities_Jan_2025.pdf
- 2025 Colorado Individual Income Tax Filing Booklet (DR 0104 Book): https://tax.colorado.gov/sites/tax/files/documents/Book104_2025.pdf
- IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs): https://www.irs.gov/pub/irs-pdf/p590b.pdf
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.