Michigan taxes for early retirees: the pension break is back, if you're old enough

By Tom, CPA · Updated October 26, 2026

TL;DR: Michigan taxes income at a flat 4.25% for 2026 and exempts Social Security. Its retirement subtraction is fully phased in for 2026 at up to $67,610 single or $135,220 joint, but IRA withdrawals and Roth conversions generally qualify only from age 59½, 401(k) money only to the extent it's employer or match-driven, and 457 money never.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Michigan spent a decade taxing pensions, felt bad about it, and spent four more years un-taxing them one quarter at a time. As of tax year 2026, the phase-in is finished: Michigan lets retirees subtract qualifying retirement and pension income up to $67,610 on a single return or $135,220 on a joint return, regardless of birth year. Social Security isn't taxed at all.

Sounds like a retiree paradise with better lakes. And for a 66-year-old with a pension, it nearly is. But the FIRE crowd reads the fine print, and the fine print in Michigan has a birthday, a matching-contribution test, and a total ban on one kind of plan. If you retire at 48 and plan to live on IRA withdrawals and Roth conversions, Michigan's generous subtraction may not apply to you for another decade. This guide walks through the rules as of October 2026 and how an early retiree can plan around them.

CPA Warning Label: Michigan's pension break checks your birth certificate and your 401(k) contribution history. Bring both, plus a calendar with your half-birthday circled.

The flat 4.25% income tax

Michigan taxes individual income at a flat rate. Michigan Treasury confirmed the 2026 rate is 4.25%. The law includes a formula that can trigger a temporary cut when general fund revenue grows faster than inflation; for 2026 it did not trigger, because general fund revenue fell 1.56% while inflation rose 2.70% (per Treasury's April 15, 2026 notice). Check Treasury each spring, since this formula decides the rate year by year.

Michigan has no standard deduction in the federal sense for most filers under 67. Instead, it starts from federal AGI, applies additions and subtractions, and then allows a personal exemption, $5,900 per person for 2026 according to Treasury's 2026 withholding guide. What's left is taxed at 4.25%. That covers wages, IRA and 401(k) distributions that don't qualify for the retirement subtraction, Roth conversions, interest, dividends and capital gains.

The retirement subtraction: phase-in complete

The Lowering MI Costs Plan (Public Act 4 of 2023) restored the pre-2012 pension subtraction over four years. Treasury's phase-in table:

For 2026, Michigan's Office of Retirement Services lists the maximum at $67,610 for single or married filing separately and $135,220 for married filing jointly. The caps are adjusted each year for inflation, using the consumer price index for the preceding calendar year, so expect a slightly higher number for 2027 once Treasury publishes it. The subtraction covers combined public and private retirement benefits that are included in AGI. Alternative methods still exist (a birth-year tier system and a special rule for qualified police, fire and corrections retirees), and filers can pick whichever is best for them each year.

The catch for FIRE readers isn't the cap. It's the definition of a qualifying distribution, which is where Michigan's generosity checks your ID.

The age 59½ gate on IRAs and Roth conversions

According to Treasury, an IRA distribution qualifies for the subtraction only if one of these is true: you are 59½ or older, you are on disability, the participant died (with special surviving-spouse rules), or the distribution is part of a series of substantially equal periodic payments under IRC 72(t)(2)(A)(iv). Treasury's additions-and-subtractions page lists IRA distributions before 59½ (outside that 72(t) exception) as not subtractable.

Roth conversions get the same treatment. Treasury's FAQ says a conversion included in AGI is subject to Michigan income tax, but it qualifies for the pension subtraction, within the statutory limits, if you are at least 59½ when it happens. Roth IRA distributions themselves aren't in AGI, so there's nothing to subtract and nothing to tax.

Translation for a classic Roth conversion ladder that starts at 50: every rung before 59½ is taxed by Michigan at 4.25%, and every rung after it can be subtracted, up to the cap. Same money, same account, different birthday, different tax bill. The tax code loves a good birthday party, and it never brings a gift. Our Roth conversion ladder guide and 72(t) SEPP guide cover the federal mechanics.

The 401(k) matching quirk and the 457 ban

This is the rule that makes Michigan unusual, and it's tailor-made to annoy super-savers. For 401(k) and 403(b) plans, Treasury says distributions qualify only to the extent they are attributable to employer contributions, or to employee contributions that the plan required in order to get the employer's match. Distributions attributable to contributions made entirely by the employee, or to deferrals above the amount needed to earn the match, do not qualify.

Read that again with your FIRE hat on. The person who maxed out a 401(k) every year, far above the match, may find that a big slice of the balance doesn't qualify for Michigan's subtraction. Treasury's employer-plan page adds that amounts from a plan that lets the employee set the deferral and doesn't prescribe a retirement age or years of service don't count as pension benefits. And Treasury states flatly that Michigan law prohibits a pension subtraction for distributions from a 457 plan.

Treasury's IRA test, by contrast, is written around age (59½) rather than the source of contributions. If your plan is to roll an old 401(k) into an IRA and rely on the IRA rule, confirm how Treasury treats rolled-over money for your situation before you build a withdrawal plan on it. Michigan's own Office of Retirement Services FAQ shows how the source rule plays out for the state's 401(k): employer money and its earnings qualify, while employee contributions and earnings do not. See 457(b) plans in early retirement for why a 457 is still valuable federally.

Social Security exempt

Michigan subtracts Social Security benefits to the extent they're included in federal AGI, so whatever portion is federally taxable is backed out on the Michigan return. In practical terms, Michigan does not tax Social Security. Railroad retirement benefits, military retirement pay and interest on U.S. government obligations (Treasury bills, notes, bonds and savings bonds) are also on Treasury's list of subtractions.

One more recent change: Public Act 24 of 2025 lets Michiganders born after 1952 who are 67 or older claim both the Michigan standard deduction and the Social Security deduction for tax years 2026 through 2028, instead of having one reduce the other. That's for traditional-age retirees; most FIRE readers will reach 67 after it expires unless the legislature extends it.

Investment income: taxed at the flat rate

Interest, dividends and capital gains are taxed at 4.25% after the personal exemption. Michigan has a senior dividend, interest and capital gains deduction, but Treasury says it's not available to anyone born after 1945. That leaves the U.S. government obligations subtraction as the main investment-income break: Treasury interest in a taxable account is Michigan-tax-free.

For an early retiree living on a taxable brokerage account in their 50s, that means each $10,000 of realized long-term gain costs $425 in Michigan tax, even in a year when the federal rate on that gain is 0%. It's still a modest bill, but it's a bill. Zero-percent gain harvesting is zero percent federally only.

Property tax: PRE, the taxable value cap, and the homestead credit

Michigan property tax has three moving parts worth knowing before you buy:

• Principal Residence Exemption (PRE). Your primary home is exempt from the local school operating millage, up to 18 mills. You have to claim it, and it's for the home that really is your principal residence, not the lake cottage you visit twice a summer.
• Taxable value cap. Annual growth in a property's taxable value is capped at the lesser of inflation or 5%. For 2026, the State Tax Commission set the inflation rate multiplier at 1.027 (2.7%). When ownership transfers, the cap comes off and taxable value resets the next year, which is why a new buyer can pay much more tax than the neighbor in the identical house.
• Homestead Property Tax Credit. A refundable credit on the income tax return for homeowners and renters with lower total household resources. For tax year 2025 (the latest instructions), it isn't available above $71,500 of total household resources or if the home's taxable value exceeds $165,400, it phases down 10% per $1,000 above $62,500, and it's capped at $1,900.

FIRE twist on the credit: total household resources is broader than AGI. The 2025 instructions include Social Security and count Roth conversions to the extent they're in AGI. A low-income early retiree might qualify for the credit in a year with no conversion and lose it in a year with a big one. Add it to the list of things a Roth conversion quietly costs.

City income taxes

Some Michigan cities levy their own income tax on top of the state's, Detroit being the best known; Treasury processes Detroit's returns, and has announced it will start processing Flint's returns from January 1, 2027. Rates, exemptions and the treatment of retirement income vary by city and are set locally, so check the city's rules before you sign a lease in a city that taxes income. Moving one suburb over can make that line on your budget disappear.

Early retiree timeline (with an Illustration)

• Before 59½: IRA withdrawals and Roth conversions are taxed at 4.25% after the personal exemption, unless they are SEPP payments under 72(t)(2)(A)(iv) or due to disability.
• 59½ and older: qualifying IRA distributions and conversions can be subtracted, up to $67,610 single or $135,220 joint for 2026 (indexed).
• Always: Social Security and U.S. Treasury interest are exempt; 457 distributions and non-qualifying 401(k) money are taxable.

Illustration: Assumptions: a married couple filing jointly, both age 55, living on cash and taxable-account principal, converting $60,000 from traditional IRAs to Roth in 2026, with no other Michigan income. Michigan income: $60,000 minus two $5,900 exemptions ($11,800) = $48,200. Tax at 4.25% = $2,048.50.

Same couple, same $60,000 conversion, but both are 60. The conversion qualifies for the retirement subtraction and fits well under $135,220, so Michigan income is $0 and Michigan tax is $0.

Five years of age, about $2,000 a year. A household with a long runway might keep pre-59½ conversions modest, live on taxable assets and Roth contributions first, then convert more aggressively after 59½, as long as the federal side (brackets, ACA credits, later IRMAA) still works. Frugal Fran mapped both spouses' half-birthdays on a calendar. Lavish Larry converted everything at 52 and is now very well informed about the 4.25% rate.

Moving to or from Michigan

Michigan taxes residents on all their income and nonresidents generally on Michigan-source income. In the year you move, you'll usually file as a part-year resident and split income by date of residency. Distributions and conversions generally follow where you live when you receive them, so the date of a large Roth conversion or a big capital gain relative to the move can change which state taxes it.

Make the move clean: license, vehicle registration, voter registration, mailing address, doctors and banks should all point to the same place, and don't keep claiming a Principal Residence Exemption on a Michigan house you no longer live in. See changing state tax residency and compare destinations with the state tax move calculator.

Federal taxes and health coverage still apply

Michigan sits on top of the federal return, which still sets the base. For 2026 the federal standard deduction is $16,100 single and $32,200 joint (IRS Rev. Proc. 2025-32), and long-term gains can fall in the 0% bracket at lower incomes. The 2027 federal figures had not been released by the IRS as of October 26, 2026.

Before Medicare, most early retirees in Michigan buy coverage through the ACA Marketplace, where premium tax credits depend on household income. The same withdrawal choices that drive Michigan tax drive what you pay for insurance, so model them together. Our guides to the ACA subsidy cliff and managing MAGI go deeper.

Your Michigan planning checklist

• Write down each spouse's 59½ date and line up conversions around it.
• Ask your 401(k) administrator for a breakdown of employer contributions, match-eliciting deferrals and other deferrals, and keep it with your tax records.
• Don't count on a Michigan subtraction for 457 distributions.
• Confirm each year's rate (4.25% for 2026) and subtraction cap with Treasury.
• Claim the Principal Residence Exemption on your home and check whether you qualify for the Homestead Property Tax Credit in low-income years.
• Check whether your city levies an income tax.

Tax rules change every legislative session. Confirm current figures with Michigan Treasury before acting, and treat this page as education, not advice for your situation.