Updated October 16, 2026. Quick answer: Vermont taxes IRA distributions that are in federal adjusted gross income, and its documents read do not mention inherited IRAs: the retirement system exemption “only applies to benefits that are based on earnings not covered” by the Social Security Act, and it does not name IRAs.
Vermont at a glance
| Item | What the documents say |
|---|---|
| How the state taxes retirement-account income | Taxed as income, starting from federal adjusted gross income; IRAs are not named in the retirement income exemption |
| Do the state’s documents address beneficiaries? | Not addressed for inherited IRAs; the only survivor wording is the military survivor benefit exemption |
| Retirement exclusion or credit | Lesser of eligible retirement system income or $10,000 (or taxable Social Security instead, one election), for the booklet’s U.S. government or state government retirement systems (the statute adds political subdivisions and instrumentalities) on earnings not covered by Social Security; phases out as income rises |
| Rate in the documents read | The 2025 schedules print rates from 3.35% to 8.75%; above $150,000 of AGI the tax is the greater of 3% of AGI less U.S. interest or the schedule |
| State inheritance or estate tax | Not mentioned in the documents read |
| Changed for 2026? | No 2026 change to this rule is stated in the documents read |
What the Vermont documents say
Vermont’s return starts with federal adjusted gross income: Line 1 of the booklet asks for the amount from the federal Form 1040.
The retirement income worksheet lets a filer elect one exemption: taxable Social Security income, or income from a contributory annuity, pension, endowment or retirement system of the U.S. government or a state government. A full exemption applies below $70,000 of AGI for joint filers or $55,000 for other statuses, and it phases out to none at $80,000 or $65,000. A filer then must “enter your eligible retirement system income or $10,000, whichever is less”.
Under 32 V.S.A. 5830e the military paragraph covers military survivor benefit income “received by an eligible beneficiary”. That is a military rule, not a rule for inherited IRAs.
The 2025 rate schedules print rates from 3.35% to 8.75%, and the booklet adds that for AGI over $150,000 line 8 is the greater of 3% of AGI less U.S. interest or the schedule calculation.
The federal 10-year rule and your Vermont 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 Vermont’s own death taxes, see Vermont estate tax.
What the documents do not say
- The documents read do not mention inherited accounts or beneficiaries of retirement accounts.
- The documents do not say whether a beneficiary of a government retirement system qualifies for the exemption.
- The booklet names IRAs outside the exemption, in its list of items that carry 24% of the additional federal tax on qualified retirement plan distributions including IRA; that is a different rule from the retirement income exemption.
- They say nothing about a deduction or credit for estate tax or income in respect of a decedent.
Common mistakes
- Assuming Vermont’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 Vermont preparer.
Related: state tax on inherited IRA withdrawals, state by state, whether Vermont taxes 401(k) and IRA withdrawals, Vermont retirement taxes, Vermont estate tax, inherited IRA rules, spouse versus non-spouse beneficiary rules, and state withholding on retirement withdrawals.
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Answer againSources
- 2025 Vermont Income Tax Booklet (Form IN-111, Schedule IN-112, Retirement Income Exemption Worksheet): https://tax.vermont.gov/sites/tax/files/documents/Income-Booklet-2025.pdf
- 2025 Vermont Tax Rate Schedules: https://tax.vermont.gov/sites/tax/files/documents/TaxRateSched-2025.pdf
- 32 V.S.A. 5830e Retirement income; Social Security income: https://legislature.vermont.gov/statutes/section/32/151/05830e
- 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.