Updated October 16, 2026. Quick answer: Kentucky excludes “100 percent of taxable retirement benefits or $31,110, whichever is less” per taxpayer for 2025, and Schedule M says income from a written retirement plan is eligible; the documents name 401(k) and similar plans but not 403(b) or 457(b).
State retirement-income forms, line by line: Kentucky Schedule M.
Kentucky at a glance
| Item | What the documents say |
|---|---|
| How the state treats 403(b) and 457(b) withdrawals | Eligible if paid under a written retirement plan; 403(b) and 457(b) are not named |
| Do the state’s documents name these plans? | The documents read name neither 403(b) nor 457(b) plans |
| Retirement exclusion or credit | Pension income exclusion of the lesser of 100 percent of taxable retirement benefits or $31,110 for 2025 |
| Public-employee pension rule | Partially exempt if retired after December 31, 1997; exempt if retired before January 1, 1998; Schedule P may be required |
| Rate in the documents read | Four percent for 2025; 3.5% for taxable years beginning on or after January 1, 2026 |
| Changed for 2026? | KRS 141.020 sets a 3.5% rate for taxable years beginning on or after January 1, 2026 |
What the Kentucky documents say
Schedule M says pension income paid under a “retirement plan (qualified or unqualified) is eligible for exclusion”, computed separately for each spouse. The Form 740 instructions tell the taxpayer to multiply the taxable amount by four percent for 2025.
For later years the statute says “the tax shall be three and one-half percent (3.5%) of net income”.
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 that if you receive pension or annuity payments from a qualified employer retirement plan, “all or some portion of the amounts you receive may be taxable unless the payment is a qualified distribution from a designated Roth account”.
What the documents do not say
- The documents read do not name 403(b) or 457(b) plans, so they do not say either is a written retirement plan for the exclusion.
- The Form 740 instructions’ chart of federal and Kentucky differences lists retirement income from Kentucky state and local government retirement systems and from federal and military retirement systems as taxable federally and, for Kentucky, as “Partially exempt if retired after December 31, 1997; exempt if retired before January 1, 1998; Schedule P may be required”.
Common mistakes
- Assuming Kentucky’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 Kentucky taxes 401(k) and IRA withdrawals, Kentucky retirement taxes, whether Kentucky taxes pensions, 403(b) withdrawal rules, 457(b) withdrawal rules, and state withholding on retirement withdrawals.
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Answer againSources
- Schedule M (2025): Kentucky Federal Adjusted Gross Income Modifications: https://revenue.ky.gov/Forms/Schedule%20M%20(2025).pdf
- 2025 Kentucky Individual Income Tax Forms: Form 740 Packet Instructions: https://revenue.ky.gov/Forms/740%20Packet%20Instructions.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 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.