Updated October 4, 2026. Quick answer: Yes, with a large exclusion. Kentucky’s 2025 instructions say “100 percent of taxable retirement benefits or $31,110, whichever is” less, per taxpayer, and the eligible income includes “pensions, annuities, IRA accounts, 401(k) and similar deferred compensation plans”. The 2026 rate is 3.5%.
State retirement-income forms, line by line: Kentucky Schedule M.
Inherited an IRA? What the state’s own documents say about taxing those withdrawals: Kentucky tax on inherited IRA withdrawals.
Hold a 403(b) or 457(b)? What the state’s own documents say about taxing those withdrawals: does Kentucky tax 403(b) and 457(b) withdrawals.
Withdrawing from an IRA or 401(k)? Whether the state withholds tax from it, from its own documents: Kentucky tax withholding on IRA and 401(k) withdrawals.
Contributing to an HSA? How the state taxes it, from its own tax documents: Does Kentucky tax HSA contributions?.
What Kentucky does with 401(k) and IRA withdrawals
The instructions say “the tax rate for individual income tax is 4%”. The documents print no age requirement and no income phase-out for the exclusion.
| Item | What the documents say |
|---|---|
| Treatment | Taxable, with a pension income exclusion of up to $31,110 per taxpayer (2025) |
| State rate | 4% for 2025; 3.5% for 2026 |
| Source | Kentucky Department of Revenue, 2025 Form 740 instructions and Schedule M; KRS 141.020 |
A $40,000 withdrawal
Of a $40,000 withdrawal, up to $31,110 is excluded on the 2025 return, leaving $8,890 (computed as $40,000 minus $31,110). At the flat 2025 rate that is $355.60 (computed as that remainder times 4%), before the standard deduction.
What changes in 2026
KRS 141.020 sets the rate for 2026 and after: “the tax shall be three and one-half percent (3.5%) of net income”. The documents read print no 2026 exclusion amount.
Federal rules
The state’s treatment sits on top of the federal one. The IRS explains the federal tax on these withdrawals in Publication 590-B, Distributions from Individual Retirement Arrangements and Publication 575, Pension and Annuity Income.
Related: whether Kentucky taxes pensions, how Kentucky taxes retirement income, whether Kentucky taxes Roth conversions, and the state-by-state table of 401(k) and IRA withdrawal tax.
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Answer againSources
- 2025 Kentucky Individual Income Tax Forms: Form 740 Packet Instructions: view the document
- Schedule M (2025): Kentucky Federal Adjusted Gross Income Modifications: view the document
- KRS 141.020 Levy of income tax on individuals: Rate of normal tax: https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=56339
Sources: the primary documents linked above, read on October 4, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the plan administrator or the agency itself is the right place to confirm anything consequential.