Arizona proposes retirement income tax exemption with new limitations

Arizona lawmakers are taking significant steps to reshape retirement income taxation in the state. During the Senate Finance meeting on February 17, 2025, a proposal was introduced to modify how retirement income is treated for tax purposes, aiming to incentivize savings among residents.

The proposed measure seeks to eliminate the taxation of various retirement income sources, including IRAs, 401(k)s, and pensions, similar to the current treatment of Social Security income, which is not subject to state income tax. However, the bill has been adjusted to remove Roth IRAs from this exemption and to cap the tax subtraction at the amount of the standard deduction.

The fiscal implications of the original proposal were substantial, estimated at around $900 million. To address this, amendments were made to scale back the financial impact, including raising the age for tax-free withdrawals from retirement accounts from 59 to 67, aligning it with the current Social Security retirement age. The revised fiscal note now estimates a cost of approximately $370 million.

This initiative reflects a broader effort by Arizona legislators to encourage saving for retirement while balancing the state's budgetary constraints. The proposal is still in its early stages, and lawmakers are inviting public consideration and feedback as they move forward with discussions on this important financial policy.