Updated October 16, 2026. Quick answer: Kentucky’s pension income exclusion covers “pensions, annuities, IRA accounts, 401(k) and similar deferred compensation plans”, up to the lesser of 100 percent of taxable retirement benefits or $31,110, and the instructions say “This exclusion is for each taxpayer”, without saying whether a beneficiary of someone else’s IRA is that taxpayer.
Kentucky at a glance
| Item | What the documents say |
|---|---|
| How the state taxes retirement-account income | Taxed as income, with a pension income exclusion |
| Do the state’s documents address beneficiaries? | Not addressed for inherited IRAs; the Form 740 instructions allow a deduction for federal estate tax on income in respect of a decedent |
| Retirement exclusion or credit | The lesser of 100 percent of taxable retirement benefits or $31,110 (2025 amount) |
| Rate in the documents read | 3.5% for taxable years beginning on or after January 1, 2026 |
| State inheritance or estate tax | Kentucky has its own inheritance tax: see CMG’s Kentucky inheritance tax page |
| Changed for 2026? | KRS 141.020 sets the rate at 3.5% from 2026; the 2026 exclusion amount was not found |
What the Kentucky documents say
The 2025 Form 740 instructions describe the pension income exclusion as the lesser of 100 percent of taxable retirement benefits or $31,110, and say the covered income “includes pensions, annuities, IRA accounts, 401(k) and similar deferred compensation plans”. They add that “This exclusion is for each taxpayer”.
The same instructions list a deduction for “Federal estate tax on income in respect of a decedent” among miscellaneous expenses, which is the closest the documents come to the inherited-account case.
KRS 141.020 prints the rate: “the tax shall be three and one-half percent (3.5%) of net income” for taxable years beginning on or after January 1, 2026.
The federal 10-year rule and your Kentucky 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 Kentucky’s own death taxes, see Kentucky inheritance tax.
What the documents do not say
- The documents read do not mention inherited IRAs by name; the exclusion list includes death benefits, without saying whether an inherited IRA counts as one.
- The $31,110 figure is the 2025 amount; the 2026 amount was not found.
- Whether a beneficiary counts as the taxpayer the exclusion is written for is not stated.
Common mistakes
- Assuming Kentucky’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 Kentucky preparer.
Related: state tax on inherited IRA withdrawals, state by state, whether Kentucky taxes 401(k) and IRA withdrawals, Kentucky retirement taxes, Kentucky inheritance tax, inherited IRA rules, spouse versus non-spouse beneficiary rules, and state withholding on retirement withdrawals.
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Answer againSources
- 2025 Kentucky Individual Income Tax Forms: Form 740 Packet Instructions: https://revenue.ky.gov/Forms/740%20Packet%20Instructions.pdf
- Schedule M (2025): Kentucky Federal Adjusted Gross Income Modifications: https://revenue.ky.gov/Forms/Schedule%20M%20(2025).pdf
- KRS 141.020 Levy of income tax on individuals: Rate of normal tax: https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=56339
- 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.