Is Pension Income Taxable in Michigan in 2026? Here’s What Changed
This is one of the most common questions I hear from Michigan pre-retirees — and in 2026, the answer changed significantly for the better.
Michigan fully phased out the taxation of pension income for retirees starting in 2026. Under the Lowering MI Costs Plan, the state completed a four-year phase-in that now makes pension income 100% exempt from Michigan state income tax for all retirees — regardless of birth year — up to $69,896 for single filers and $139,792 for married couples filing jointly.
For one of our clients, this single rule change — applied to her ongoing Roth conversion strategy — is projected to create nearly $300,000 in additional tax-free assets for her children over her retirement. I’ll walk through exactly how below.
First, here’s exactly what the new rules mean, what the limits are, and — importantly — what this actually means for your monthly take-home income.
The 2026 Michigan Pension Tax Rules — What’s Exempt
Starting in 2026, Michigan’s pension and retirement income exemption applies to all retirees regardless of birth year. The exemption limits and key conditions are:
| Income Type | 2026 Michigan Exemption | Key Condition |
| Pension income | Up to $69,896 single / $139,792 joint — fully exempt | No age requirement — applies to all Michigan retirees regardless of birth year |
| IRA / 401(k) distributions (pre-tax) | Included in the $69,896 / $139,792 combined limit | Must be age 59.5+ OR qualify under 72(t), disability, or surviving spouse exception |
| Social Security | Completely exempt from Michigan income tax | No income limit, no age requirement |
| Roth IRA distributions | Not counted toward exemption limit — already tax-free | Qualified distributions are fully exempt from Michigan income tax |
Important: The $69,896 single / $139,792 joint limit applies to the combined total of qualifying pension income and pre-tax IRA and 401(k) distributions. Income above those limits may still be subject to Michigan’s 4.25% state income tax.
From 2026 onward, every Michigan retiree — regardless of birth year — qualifies for the full pension income exemption up to $69,896 single / $139,792 joint.
What This Actually Means for Your Monthly Net Income
This is where the rule change gets concrete. Michigan withholds 4.25% state income tax on pension and IRA distributions. For retirees who now qualify for the full exemption, that withholding can be eliminated — and the result shows up directly in your monthly check.
| Scenario | Monthly Impact |
| Married couple at full $139,792 joint exemption | Michigan withholds 4.25% state tax on retirement income. At the full exemption limit, eliminating withholding frees up approximately $495/month in additional net income. |
| Annual savings at full exemption (joint) | $139,792 × 4.25% = $5,941 per year returned to the household |
| Single filer at full $69,896 exemption | Eliminating Michigan withholding up to the single limit saves approximately $247/month — $2,971 per year |
For many of our married clients, this single change means nearly $500 more per month in take-home income — without changing investments, spending, or anything else. If you’re currently having Michigan state tax withheld from your pension or IRA distributions and you’re at or below the exemption limit, talk to your plan administrator about adjusting or eliminating that withholding.
The IRA Exception: Who Qualifies Under 59.5
While pension income has no age requirement to qualify for the exemption, IRA and 401(k) distributions are generally only exempt if you are age 59.5 or older. However, there are three additional exceptions that allow the exemption even if you’re under 59.5:
- IRC Section 72(t) substantially equal periodic payments (SEPP) — If you are taking systematic withdrawals from your IRA under the 72(t) rule, those distributions qualify for the Michigan exemption even if you’re under 59.5.
- Disability — If you qualify as disabled under the relevant IRS definition, your IRA distributions are exempt from the 59.5 requirement.
- Surviving spouse — If you are a surviving spouse and the deceased qualified for the subtraction at the time of death, you may qualify for the exemption even if you would not otherwise meet the age requirement.
For most early retirees who don’t fall into one of these exceptions, the sequence of withdrawals remains an important planning consideration — pension income is exempt at any age, while IRA withdrawals before 59.5 are generally not.
Pension income is exempt at any age. IRA distributions are exempt at 59.5+ or under three specific exceptions: 72(t) payments, disability, or surviving spouse status.
What If You’re 59 Now and Planning to Retire Soon?
This comes up constantly: you’re 59, not yet 59.5, sitting on a large 401(k), and wondering whether to convert to a Roth before you retire — partly for the tax picture, partly just to get it done before life gets busier.
A few things matter here, and they’re easy to mix up:
- The 59.5 threshold is about Michigan’s exemption, not just the 10% federal penalty. Even if you’re past the point where early-withdrawal penalties apply to you, distributions taken before 59.5 generally don’t qualify for Michigan’s pension/retirement income exemption unless one of the three exceptions above applies. That means a distribution at 59 could face Michigan’s 4.25% tax that the identical distribution at 59.5 would not.
- Rolling a 401(k) into a Roth IRA is a conversion, not a rollover — it’s a taxable event in the year you do it, both federally and (if you’re under 59.5 and don’t qualify for an exception) at the Michigan level too. This is different from a standard 401(k)-to-traditional-IRA rollover, which isn’t taxable at all.
- Timing the conversion relative to your 59.5 birthday and your retirement date can matter more than the conversion itself. Waiting even a few months, so the conversion happens after you turn 59.5, can be the difference between the converted amount counting toward your Michigan exemption and it not qualifying at all.
For someone in this position, the sequence generally worth modeling is: confirm the exact 59.5 date, map it against the planned retirement date and any pension start date, and size the conversion (or split it across two tax years) so it lands in a year where the Michigan exemption is actually available. Converting a large 401(k) all at once, before 59.5, without checking this can mean paying Michigan tax on the entire converted balance that could otherwise have been exempt.
Real Client Example: How This Supercharges Roth Conversions
Beyond the direct monthly income benefit, Michigan’s 2026 exemption has created a powerful secondary effect for clients doing Roth conversions. Here’s a real example from our practice.
One of our clients retired at age 60 and we began planning annual Roth conversions of approximately $50,000 per year (inflating by 3% annually to reflect rising tax thresholds over time), continuing to her life expectancy at age 90.
In the first year alone, the Michigan exemption saved her $2,125 in state taxes on that $50,000 conversion. Under our plan, those savings go directly into her Roth account to grow tax-free.
Over her projected 30-year retirement, this single planning element — the Michigan state tax savings on annual Roth conversions — is estimated to generate an additional $294,734 in tax-free Roth assets for her children. That’s real generational wealth created entirely because of this exemption.
— Andrew Charbonneau, CFP®
$294,734 in additional tax-free Roth assets — created solely by Michigan’s 2026 pension exemption applied to a 30-year Roth conversion strategy.
Coordinating Roth Conversions with a Social Security Delay Strategy
Roth conversions and Social Security timing are usually discussed as separate decisions. In Michigan, the 2026 exemption rules make them work together — and the order you do them in matters more than most retirees realize.
Here’s the logic: Social Security is completely exempt from Michigan tax regardless of when you claim it. Pension and IRA income, by contrast, is only exempt up to $69,896 single / $139,792 joint. That creates a window — the years between retirement and claiming Social Security — where you can convert traditional IRA dollars to Roth at little or no Michigan tax cost, because your only other income is filling up an exemption bucket that would otherwise go unused.
Delaying Social Security stretches that window. Every year you wait is another year of low-reported income you can fill with a Roth conversion instead of a Social Security check that (while state-tax-free) would otherwise use up part of your standard deduction and lower tax brackets at the federal level.
| Approach | What Happens in Michigan |
| Claim Social Security immediately, convert nothing | Social Security is Michigan-tax-free either way, but the IRA balance keeps growing untouched — building toward larger future RMDs taxed at ordinary rates once you’re past the exemption limit |
| Delay Social Security, convert IRA to Roth in the gap years | Conversion income fills the Michigan exemption bucket at 0% state tax; federal bracket stays lower since Social Security isn’t yet layered on top; future RMDs shrink; delayed benefit grows ~8%/year |
| Delay Social Security, convert IRA, coordinate with pension start date | Same as above, sequenced so pension income (also exempt) doesn’t stack with conversion income and push the household past the $69,896/$139,792 combined limit in any single year |
For a household with a traditional IRA and the flexibility to delay Social Security, the years before claiming are often the single lowest-tax window of retirement for Roth conversions in Michigan — precisely because the state exemption and the absence of a Social Security check line up at the same time.
This is the same mechanism behind the $294,734 projection in the client example above — the conversions there ran during exactly this kind of gap, with Social Security intentionally delayed to extend it.
The catch is sequencing. Converting too aggressively in a single year, or starting pension income before the conversion window closes, can push combined income past the Michigan exemption limit and into the 4.25% bracket — plus potentially higher federal brackets. This is a year-by-year modeling exercise, not a one-time decision — see our post on Roth conversion strategy and RMD tax planning in Michigan for a deeper look at how this plays out over a full retirement — which is why we revisit the conversion amount annually with clients rather than setting a fixed number at retirement.
How Michigan Phased Out Pension Tax from 2023 to 2026
It’s worth understanding the context. Michigan’s phase-in worked as follows — with 2026 being the first year all retirees receive the full exemption:
| Birth Year | 2023 | 2024 | 2025 | 2026 onward |
| 1945 and before | Full amount | Full amount | Full amount | Full amount |
| 1946–1958 | 25% of full | 50% of full | 75% of full | Full amount |
| 1959–1962 | No exemption | 50% of full | 75% of full | Full amount |
| 1963–1966 | No exemption | No exemption | 75% of full | Full amount |
| 1967 and after | No exemption | No exemption | No exemption | Full amount |
Source: Municipal Employees’ Retirement System (MERS) of Michigan — Phase in of Pension Tax Deduction under the Lowering MI Costs Plan.
The “full 2026 amount” referenced in the MERS chart is $67,610 for single filers and $135,220 for married couples filing jointly. As of 2026, the phase-in is complete and all retirees receive the full exemption.
What This Means for Your Retirement Income Plan
1. Eliminate Michigan Withholding on Pension and IRA Income
If you’re at or below the exemption limit, you can request that Michigan state tax withholding be eliminated from your pension payments and IRA distributions. This doesn’t change your federal tax situation — it simply stops Michigan from withholding 4.25% that you no longer owe. For married couples at the full limit, this can mean nearly $500 more per month.
2. Roth Conversions Are More Valuable Than Ever
The Michigan exemption applies to traditional IRA dollars converted to Roth — meaning the state tax that would normally apply to a conversion disappears up to the exemption limit. For clients doing annual Roth conversions, this is a meaningful reduction in the cost of converting. The savings compound significantly over a long retirement, as our client case study illustrates.
3. Income Sequencing Above the Limit
If your combined pension and pre-tax retirement income exceeds $69,896 single or $139,792 joint, the excess is still subject to Michigan’s 4.25% state tax. For higher-income retirees, drawing strategically from Roth accounts or taxable brokerage accounts — which don’t count toward the limit — can reduce exposure above the threshold.
4. Social Security and Delay Strategy
Social Security is completely exempt from Michigan income tax — no limit, no age requirement. Delaying Social Security to maximize your benefit creates a larger, fully untaxed income stream in later retirement years. The Michigan tax picture clearly favors delay, especially when combined with Roth conversions in early retirement years.
Learn more about Social Security timing strategies for Michigan.
5. Pension Election Considerations
For those choosing between a lump sum and an annuity pension, the 2026 exemption applies to monthly pension income at any age — but a lump sum rolled to a traditional IRA is subject to the 59.5 age requirement (unless an exception applies). For automotive professionals specifically, this is one more factor to model before making a permanent pension election.
For more on pension decisions, see our post on retirement planning for Michigan automotive professionals.
Want to Know Exactly How Michigan’s 2026 Rules Affect Your Retirement Plan?
Fiduciary • Independent • Michigan-Based • Auburn Hills, MI
A Note on Future Changes
Michigan’s pension tax rules have changed significantly in recent years and may continue to evolve. The 2026 exemption amounts described in this post reflect the current rules as of mid-2026. Part of working with a fiduciary financial advisor in Auburn Hills is making sure your retirement income plan is updated whenever the rules shift — not after you’ve already filed.
Our retirement planning services and tax planning services cover exactly this kind of Michigan-specific analysis, updated annually as the rules change.
Frequently Asked Questions
It depends on your birth year. Michigan uses a three-tier system: retirees born before 1946 generally pay no Michigan income tax on pension and retirement income; those born between 1946 and 1952 receive a partial deduction that increases at age 67; and those born after 1952 have a more limited deduction with a phase-in schedule. The full deduction for all tiers is available at age 67.
Michigan generally exempts Social Security income from state income tax for retirees who qualify for the full pension deduction — typically at age 67 or for those born before 1946. For retirees who don’t yet qualify for the full deduction, Social Security may be partially included in Michigan taxable income depending on your overall income picture.
For retirees born after 1952, the Michigan pension deduction phases in gradually as you age, reaching the full deduction amount at age 67. Before age 67, a limited deduction applies. At age 67, you can deduct up to $20,000 of qualifying retirement income if filing single, or $40,000 if filing jointly. The exact amounts and phase-in schedule should be confirmed against current Michigan Department of Treasury guidance.
Michigan’s pension tax rules create real planning opportunities around income sequencing, Roth conversions, and Social Security timing. For retirees in Tier 2 or Tier 3, the years between retirement and age 67 are the most important window for Michigan-specific tax planning — how you structure withdrawals during that window directly affects your state tax bill.
Redwood Wealth Management is a fiduciary financial advisory firm based in Auburn Hills, MI. We provide Michigan-specific retirement income planning that accounts for state pension tax rules, income sequencing, Roth conversion strategy, and Social Security timing. Schedule a free strategy conversation to discuss your specific situation.
For many Michigan retirees, yes — delaying Social Security while converting traditional IRA funds to Roth during the gap years can take advantage of Michigan’s pension and retirement income exemption ($69,896 single / $139,792 joint in 2026) at little or no state tax cost, since Social Security isn’t yet adding to taxable income. The right amount to convert each year depends on your total income, pension timing, and federal tax bracket, so this generally requires year-by-year planning rather than a fixed strategy.
It depends heavily on timing relative to your 59.5 birthday. Michigan’s retirement income exemption generally requires you to be 59.5 or older (or qualify under the 72(t), disability, or surviving spouse exceptions) for IRA and 401(k) distributions — including Roth conversions — to count as exempt. Converting before 59.5 can mean the entire converted amount is subject to Michigan’s 4.25% tax, while the same conversion done after 59.5 may be exempt up to the $69,896 single / $139,792 joint limit. For most people with a large balance, it’s worth modeling the conversion against your exact birthday and retirement date rather than converting on a fixed schedule.
Andrew Charbonneau, CFP®
Founder & Financial Advisor, Redwood Wealth Management
Auburn Hills, MI | redwood-wealth.com | (248) 266-1386
Andrew is a CERTIFIED FINANCIAL PLANNER™ professional and fiduciary advisor serving Michigan families across Oakland County. He specializes in retirement income planning, tax strategy, and comprehensive financial planning for professionals and families in Auburn Hills, Rochester Hills, Birmingham, Bloomfield Hills, and Royal Oak.
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DISCLAIMER: This post is for informational purposes only and does not constitute tax or legal advice. Michigan pension tax rules are subject to change. Exemption limits referenced reflect 2026 rules as confirmed by Andrew Charbonneau, CFP®. The Roth conversion projection is based on a specific client scenario and individual results will vary. Please consult a qualified tax professional or fiduciary financial advisor for guidance specific to your situation.