Retiring in Alabama

Every figure below is sourced to Alabama’s own publications and dated. Estimates only, and not tax advice.

Retirement tax by state

What your state actually takes from a 401(k) withdrawal, a pension, and Social Security — in dollars, not a yes/no list.

Brokerage account growth

Long-term index-fund growth after expense-ratio drag — and what your state takes from the gains at withdrawal.

Roth vs. Traditional

Decided on the two rates that actually govern it — yours now, and yours at withdrawal, in the state you'll retire in rather than the one you're in.

Contribution limit optimizer

2026 limits, employer match, the 60-63 super catch-up, and whether the Roth catch-up mandate applies to you.

Required minimum distribution

When your RMDs start under SECURE 2.0, how much this year's is, and what missing it costs.

Backdoor Roth pro-rata

What a backdoor Roth conversion would actually cost you in tax — the pro-rata rule most calculators only describe.

Self-directed IRA real estate (UDFI)

The tax a leveraged rental owes inside a self-directed IRA — computed at trust rates, not the rate you'd assume.

Alabama at a glance

401(k) and IRA withdrawals
Taxed
Social Security
Not taxed
Top marginal rate
5%
The top of 3 graduated brackets.
Tax year
2025
Brackets are legislated and change on a fixed calendar, so the year matters.
  • Alabama's retirement rule turns on PLAN TYPE rather than on age or income: defined benefit pensions and military retirement are exempt in full, while 401(k), 403(b) and IRA distributions are fully taxed with no exclusion at any age.
  • Social Security and Railroad Retirement never enter Alabama gross income at all -- they sit on the do-not-report list rather than being subtracted.
  • Alabama draws NO distinction between private and public pensions, because both qualify through the same IRC 414(j) defined-benefit test rather than through a government-service carve-out.
  • The $6,000 age-65 exclusion for defined contribution distributions enacted by Act 2022-297 does not appear anywhere in the 2025 Form 40 booklet and is not modelled here -- see NEEDS_VERIFICATION.

Local income tax applies in parts of Alabama

ALABAMA MUNICIPALITIES LEVY OCCUPATIONAL LICENSE TAXES ON WAGES EARNED IN THE CITY, and they are a real cost that a state-only calculation misses. They are imposed by city ordinance on the privilege of working within the municipality, apply to RESIDENTS AND NON-RESIDENTS ALIKE based on where the work is performed rather than where the worker lives, and are withheld by employers. Roughly two dozen Alabama cities levy one, commonly in the 1%-2% range; Birmingham at 1% is the largest and most frequently encountered, and Gadsden at 2% is at the high end. THE BASE IS EARNED INCOME ONLY -- wages, salaries and commissions. These taxes do not reach interest, dividends, capital gains, pensions or Social Security, so an Alabama retiree living on investment and retirement income pays none of it while a wage-earner in the same city pays it on every dollar, with no exemption threshold and no standard deduction. Alabama's own Form 40 instructions confirm these exist by directing filers NOT to include 'Local, city, or occupational tax' in the Alabama income tax withheld figure. THE RATES RECORDED HERE ARE FLAGGED: they are set by individual city ordinance rather than by state statute, no state source enumerates them, and neither city's ordinance was retrieved directly -- see NEEDS_VERIFICATION.