How California Taxes Impact Your Retirement Income
Retirement can bring freedom and flexibility—but it can also bring surprises, especially when it comes to taxes. For many Californians, understanding how the state taxes (or doesn’t tax) different sources of retirement income can make a meaningful difference in how long savings last.
What California Taxes—and What It Doesn’t
One piece of good news: California does not tax Social Security benefits. Whether you receive retirement, spousal, or survivor benefits, they’re excluded from state income taxes.
However, most other forms of retirement income are taxable. Distributions from traditional IRAs, 401(k)s, 403(b)s, and pension plans are taxed at the same rates as wages. Unlike federal law, California doesn’t give capital gains any special treatment, so profits from selling investments are taxed as regular income, too.
If your taxable income exceeds $1 million, there’s an extra 1% “Mental Health Services Tax.” And while California has no estate or inheritance tax, income generated by inherited assets—such as dividends, rent, or interest—is still taxable.
New in 2025: Military Retirement Pay Relief
Starting with the 2025 tax year, California is introducing a partial exemption for military retirees. Up to $20,000 of uniformed services retirement pay—and up to $20,000 of Survivor Benefit Plan (SBP) payments—can be excluded from state income taxes each year through 2029.
For veterans and surviving spouses, this change provides a bit of breathing room and a reason to reassess how military pension income fits into your broader retirement strategy.
The Hidden Traps: Accounts That California Treats Differently
California’s tax code doesn’t always align with federal rules, which can lead to surprises.
Health Savings Accounts (HSAs): Unlike the federal government, California does not allow tax-deductible HSA contributions or tax-free growth. That means you’ll owe state income tax on any HSA earnings, even if the money stays in the account.
529 Education Savings Plans: California doesn’t offer a state deduction for contributions, and it doesn’t conform to the new federal rule allowing 529-to-Roth IRA rollovers. If you make one of those rollovers, it’s taxable income in California, and it may even trigger an additional 2.5% early-distribution tax.
Early Retirement Withdrawals: California adds its own 2.5% early-withdrawal penalty to the federal 10% if you take money from a retirement account before age 59½ (unless you qualify for an exception).
These details can add up over time, and they’re a big reason to review your plan before taking any withdrawals.
Property Taxes: When You Move or Inherit
For many Californians, property taxes are just as important to retirement planning as income taxes. Two voter-approved measures—Proposition 13 and Proposition 19—shape how your property is taxed and reassessed.
If you’re 55 or older, severely disabled, or a victim of wildfire or natural disaster, Prop. 19 allows you to transfer your current property tax base to a new home anywhere in California, even if it’s more expensive. That can be a major benefit if you’re downsizing or relocating in retirement.
However, Prop. 19 also narrowed the old parent-child transfer rules. Today, your children can inherit your low property tax base only if the home becomes their primary residence, and only up to a capped value.
If property taxes are creating financial strain, the Property Tax Postponement program may help. Homeowners who are 62 or older, blind, or disabled can defer property taxes on their primary residence if they meet income and equity limits. Deferred taxes accrue modest interest and are repaid later, such as when the home is sold.
Planning Ahead: Withdrawal Timing and Relocation
Because California taxes investment income, retirement withdrawals, and capital gains all at ordinary rates, timing matters. Some retirees benefit from strategically drawing from taxable accounts first and converting portions of IRAs to Roth accounts in low-income years. Others time large withdrawals or Roth conversions after moving to a state with no income tax.
Under federal law, California can’t tax qualified retirement income once you’re a nonresident. That means the timing of a move can have a real effect on your lifetime tax bill.
The Bottom Line
California’s sunshine comes with a complex tax code, and that can make retirement planning feel complicated. But with the right strategy and awareness of state-specific rules, you can simplify the complexity and create a retirement income plan that incorporates both federal and state tax rules.
At Parkshore Wealth Management, we help clients understand how each piece of their income puzzle fits together: Social Security, pensions, investment accounts, property, and taxes, both federal and state. Knowing how the rules work is key to protecting the lifestyle you’ve worked hard to build.
Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.