State Source Tax on Retirement Income — 4 U.S.C. § 114

4 U.S.C. § 114 is the federal law that prevents states from taxing the retirement income of people who no longer live there. The rule is simple: a state cannot impose an income tax on retirement income received by a non-resident. If you spent 30 years building a pension in California, then retired to Nevada, California cannot tax your pension checks. The protection covers 401(k) distributions, IRA withdrawals, 403(b) and 457 plan payments, governmental pensions, and other qualified retirement income paid in substantially equal periodic payments. Congress enacted the law in 1996 after a decade of controversy over California's attempt to assert lifetime taxing authority over pension income earned within its borders — the Ninth Circuit struck down California's source tax as unconstitutional, and Congress then codified the protection for all states. For the parallel question of which states tax Social Security benefits — which § 114 does not directly address — see Social Security Benefit Taxation.

Current Law (2026)

The Source Tax Problem § 114 Solved

Before 1996, a handful of states — most prominently California — asserted the right to tax pension income that had been earned within the state, even after the recipient moved away. The theory was that the pension was compensation for services performed in California, so California had a "source" claim on the income when it was paid out, regardless of where the retiree now lived.

The practical problem: a retiree could end up paying income tax to their former state (where they earned the pension) and also owe income tax to their new state (where they now live). Double taxation on the same pension income.

The Ninth Circuit struck down California's source tax as an unconstitutional burden on the right to travel and interstate commerce. Congress then enacted § 114 in 1996 to give the protection explicit federal statutory force nationwide — so it applies equally to every state, not just states covered by Ninth Circuit precedent.

What "Retirement Income" Means Under § 114

The statute enumerates covered sources:

Qualified plan distributions:

• 401(a) trusts (401(k), profit-sharing, pension plans)
• Simplified Employee Pensions (SEPs, § 408(k))
• 403(a) annuity plans (older form of employer annuity)
• 403(b) annuity contracts (nonprofit and school employees)
• IRAs (traditional, rollover, Roth distributions from IRAs)
• 457(b) eligible deferred compensation plans (governmental and nonprofit)
• Governmental plans (§ 414(d))
• 501(c)(18) employee funded pension trusts

Non-qualified arrangements — with a condition: Plans, programs, or arrangements that are not qualified under the IRC can still qualify as "retirement income" under § 114 if the payments are either:

• Substantially equal periodic payments (SEPPs) for the life or life expectancy of the recipient (or joint lives), or for a period of 10 or more years; or
• Payments under a plan maintained solely for the purpose of providing retirement benefits in excess of IRC contribution/benefit limits (i.e., supplemental executive retirement plans, or SERPs)

This means most structured pensions and annuities qualify, whether or not they are formally qualified under the IRC. The key test for non-qualified arrangements is the periodicity and duration requirement.

Retired partner income is also covered if the partnership agreement provides for retirement payments in recognition of prior service, paid in SEPP form.

What § 114 Does NOT Cover

Social Security benefits. § 114 does not address Social Security. Whether a state can tax Social Security benefits of non-residents is a different question. In practice, only about 10 states tax Social Security benefits at all, and those states generally only do so for residents — but the legal basis is state law and the Social Security Act, not § 114.

Non-retirement investment income. Capital gains, dividends, interest, and rental income earned in a state may still be taxed by the source state under normal income tax sourcing rules. Moving to Florida does not protect California-source capital gains from California tax if you sell California real estate after moving.

Wages and salaries. If you continue to work (including remotely) in a state after moving away, that state generally retains taxing authority over the wages attributable to services performed there.

Lump-sum distributions that don't qualify as SEPPs. A single lump-sum distribution from a non-qualified plan that doesn't meet the substantially-equal-periodic-payments standard may fall outside § 114's protection for that specific plan type. Qualified plan lump sums (from a 401(k), IRA, etc.) are still covered because those plans are expressly enumerated.

Domicile — The Key Determination

The protection applies to individuals who are not a resident or domiciliary of the taxing state, as determined under that state's own laws. Each state has its own rules for determining domicile:

• Most states require both physical abandonment of the prior domicile (change of principal home) and intent to make the new state a permanent home
• Partial-year residency is the battleground: if you lived in California for 7 months and Nevada for 5 months, California may claim you were a resident for the year
• High-audit-risk indicators: maintaining a California home after moving, spending substantial days in California, keeping California licenses and bank accounts, voting in California
• California specifically: California has aggressive residency audits and uses a "safe harbor" rule — if you maintain a California domicile and are present in California for more than 546 days over any consecutive two-year period, you are presumed a California resident

The § 114 protection is most secure for full-year non-residents. Establishing clear domicile in a new state before pension payments begin — and maintaining documentation of the move — is important for retirees relying on § 114.

Planning for Retirees Considering a Move

Which states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming impose no personal income tax. Retiring to one of these states means zero state income tax on retirement income. § 114 protects you from the state you left.

States that exempt retirement income broadly: Illinois exempts all qualified retirement income including Social Security. Pennsylvania exempts retirement income for residents aged 60+. Mississippi exempts all qualified retirement income. Some other states have partial exemptions.

The interaction with SALT: If you live in a high-tax state, your state income taxes on retirement income may be partially deductible on your federal return — but only up to the $10,000 SALT cap. This limits the federal offset for high-income retirees in states that do tax retirement income.

The timing question: § 114 protects retirement income paid after you have established non-resident status. The question of whether your accrued pension benefit is taxed at distribution depends on the form of the payment — periodic payments clearly qualify; other arrangements may require analysis.

How It Affects You

If you're planning to retire and move to a lower-tax state, § 114 is the federal protection that makes the move financially effective — but establishing domicile correctly is your most critical task. The law prohibits your former state from taxing your qualified retirement income (401(k) distributions, IRA withdrawals, 403(b)/457 payments, pensions) after you've left — but "after you've left" means legally domiciled elsewhere. California is the highest-stakes jurisdiction: it has the highest state income tax rate in the country (13.3% top marginal rate) and the most aggressive residency audit program. California's "safe harbor" means you're presumed to be a California resident if you maintain a California home and spend more than 546 days in any consecutive two-year period in California — which catches many people who retire and move but maintain a California home for family or property reasons. Before you move, establish your new state domicile clearly: file an address change with the U.S. Post Office, register to vote in the new state, update your driver's license, open bank accounts in the new state, join local clubs or community organizations, and if you own a California home, rent it out or sell it rather than keeping it available for your personal use. Maintain a domicile change journal with dated entries documenting every step of your move and every day you spend in each state for at least two years post-move. If your retirement income is substantial (over $500,000/year), consider engaging a tax attorney who specializes in California residency audits before you move, not after.

If you receive a pension from a state or local government employer — a CalPERS pension, a Texas TRS annuity, a New York State pension — your pension payments are expressly covered by § 114 under the governmental plan (§ 414(d)) enumeration. If you earned a California public school teacher's pension and retire to Arizona, California cannot tax those monthly CalSTRS payments. This applies regardless of how long you worked in California and regardless of when you left California state employment. The protection is permanent and applies to each monthly payment as long as you are a non-resident of California. The practical risk is ensuring you've actually established non-domicile status — California will audit retirees who receive large state pension payments and claim to have moved. For New York state or city pensions: New York also has aggressive statutory residency rules — if you maintain a "permanent place of abode" in New York (a home you have the right to use) and spend more than 183 days in New York in a year, you may be treated as a New York resident even if you've moved. Track your days in New York if you maintain a vacation home or spend time with family there.

If you have a SERP, non-qualified deferred compensation, or executive retirement plan, § 114 protection depends critically on how your payments are structured. Qualified plans (401(k), IRA, pension) are expressly enumerated and clearly covered. Non-qualified plans are covered only if payments are structured as substantially equal periodic payments (SEPPs) for the recipient's life or life expectancy, or for a period of 10 or more years. If your company has structured your SERP as monthly payments over 15 years — clearly covered. If you receive a lump-sum payment from a non-qualified plan — potentially not covered, depending on plan terms and how the state characterizes it. Before you move states, review your non-qualified plan documents with a tax advisor specifically to analyze § 114 coverage. If your plan gives you payment timing elections, choosing the SEPP or 10+ year structure may be more tax-efficient than a lump-sum. Some high-income executives have annual deferred compensation that exceeds plan caps and is paid out in structures that may or may not qualify — this is the area where § 114 analysis is most fact-specific and where errors are most expensive.

If you're a tax professional advising retirees on interstate moves, the § 114 analysis is the starting point but not the full picture. Covered income (pension, IRA, 401(k) distributions) is protected from source-state taxation; non-covered income (wages from part-time work, investment income, rental income from property in the source state) may still be subject to source-state tax. A retiree who moves from California to Nevada to escape state income taxes but continues doing consulting work for California clients — even remotely — may owe California income tax on consulting wages. A retiree who sells California real estate after moving will owe California capital gains tax on the appreciation allocated to California-source gains. The full interstate tax analysis for a retiree moving from California or New York typically requires: (1) § 114 analysis for retirement account distributions; (2) domicile documentation review; (3) non-retirement income sourcing analysis; and (4) review of any California or New York activity that could trigger statutory residency rules. For California-specific guidance, the Franchise Tax Board publishes FTB Publication 1005 (Pension and Annuity Guidelines) and the California Society of CPAs (calcpa.org) maintains member resources on state residency and retirement income taxation.

State Variations

While § 114 is a federal protection, states still determine residency and administer the rule. Key state-level dynamics:

• California: Most aggressive in auditing retirement-related domicile changes; 13.3% top rate makes the stakes high; careful residency documentation required
• New York: Similar audit aggressiveness; "statutory residency" rules can trap part-year residents who maintain a permanent place of abode and spend 183+ days
• Connecticut, Massachusetts, Oregon: Tax retirement income for residents but cannot tax non-residents per § 114
• States that don't tax retirement income: Ohio, Pennsylvania (for residents 60+), Illinois, Mississippi exempt all or most qualified retirement income even for residents, reducing the practical need for § 114 analysis for state-to-state moves involving these states

Recent Developments

§ 114 has remained essentially unchanged since 1996. The main ongoing issues are state audit enforcement against claimed non-residents (particularly California and New York) and the question of whether new forms of retirement income — deferred comp arrangements, partnership retirement payments, structured settlements — meet the coverage tests. Remote work has also created new complexity: retirees who do part-time consulting work in a former state of residence may find that state asserting taxing authority over their work income while § 114 protects their pension income separately.