Updated October 7, 2026. Quick answer: Yes, when federal tax is withheld. The Department of Taxes’ 2026 withholding instructions say payers must withhold Vermont “income tax on payments to Vermont residents when federal withholding is required”, and for a one-time payment “the Vermont withholding can be estimated at 30% of the federal withholding”.
Drawing a pension? Whether the state withholds tax from it, from its own documents: Vermont tax withholding on pension payments.
Vermont withholding at a glance
| Item | What the documents say |
|---|---|
| Is it required? | Yes on payments to Vermont residents when federal withholding is required, and when the recipient elects federal withholding without stating the payment is exempt from Vermont withholding |
| Rate or amount | For non-periodic payments, estimated at 30% of the federal withholding; periodic payments use the Vermont wage charts or tables |
| How to start or stop it | Not stated for pensions in the documents read; Form W-4VT is described only as an employee allowance certificate |
| Direct rollover | Not stated in the documents read |
| Changed for 2026? | The instructions read are the 2026 edition; no change to this rule is stated |
What the Vermont documents say
The Department of Taxes’ 2026 Income Tax Withholding Instructions, Tables, and Charts have a section on annuities, supplemental payments and deferred compensation payments. It says payers must withhold Vermont “income tax on payments to Vermont residents when federal withholding is required”. It adds that Vermont withholding is also required where the recipient elects optional federal withholding and does not state that the payment is exempt from Vermont withholding.
For one-time payments the section gives a shortcut: “the Vermont withholding can be estimated at 30% of the federal withholding”, and says in all cases the taxpayer is responsible for ensuring the correct amount is withheld to avoid underpayment. A payment under a non-qualified deferred compensation plan is treated separately, at 6% of the deferred payment.
A $50,000 withdrawal: cash in hand or a direct rollover
Take a $50,000 401(k) withdrawal paid to you. The IRS says a taxable eligible rollover distribution paid to you from an employer plan is subject to “mandatory income tax withholding (generally at a rate of 20%)”, which on $50,000 is $10,000 (computed as $50,000 times 20%) held back for federal tax. Vermont’s estimate is 30% of that federal amount: $3,000 (computed as $50,000 times 20% times 30%) for Vermont.
The other path is a direct rollover to an IRA or another plan. For federal tax the IRS says “The mandatory withholding doesn’t apply in a direct rollover”. The Vermont documents read do not say how a direct rollover is treated for state withholding, so confirm it with the payer before choosing.
What a mover should know
This page is about Vermont as a state of residence. An instruction line written for a nonresident or part-year filer is not the rule for a resident, and none of the documents read settles a part-year or two-state case, so check each state’s own rule. The federal side is the same everywhere; CMG’s federal 20% withholding on a pension lump sum page covers it, and state withholding on retirement withdrawals lists the other states checked.
What the documents do not say
- The documents read name no Vermont form for a pension payee to change withholding, and do not address a direct rollover. The 30% is an estimate the instructions allow, not a fixed rate.
Common mistakes
- Treating 30% as a percentage of the withdrawal; the instructions apply it to the federal withholding.
- Assuming the payer’s estimate settles the tax; the instructions say the taxpayer is responsible for the correct amount.
- Assuming the answer for one state applies to another, or that state withholding settles the state tax owed at filing.
Related: state withholding on retirement withdrawals, how Vermont taxes 401(k) and IRA withdrawals, Vermont retirement taxes, and retirement withholding calculator.
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Answer againSources
- 2026 Income Tax Withholding Instructions, Tables, and Charts (GB-1210-2026): https://tax.vermont.gov/sites/tax/files/documents/GB-1210-2026.pdf
- IRS Tax Topic 413, Rollovers from retirement plans: https://www.irs.gov/taxtopics/tc413
Sources: the primary documents linked above, read on October 7, 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.