Iowa Retirement Tax Friendliness

Iowa Retirement Taxes

While Iowa has no turquoise waters or white-sand beaches, it still offers plenty for seniors who are in or approaching retirement. Cities like Des Moines and Cedar Rapids offer culture and fine dining, while smaller towns like Ames and Dubuque have quiet streets and a low cost of living. But what about the Hawkeye State’s tax environment?

Iowa exempts all Social Security income from income taxes, and as of January 2023, excludes other forms of retirement income. However, it is one of the few states with an inheritance tax. Its property taxes are also higher than average.

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Is Iowa tax-friendly for retirees?

Iowa is certainly tax-friendly for retirees. Social Security benefits are exempt from the Iowa state income tax. Meanwhile, Iowans age 55 and older are also exempt from paying state taxes on retirement income, including distributions from a 401(k), IRA, pension, annuity and other assets.

Additionally, taxpayers 55 and older who do a Roth conversion may also qualify for a retirement income exemption. And those under age 55 may also get a tax break if they inherited a retirement plan from someone else. For more details, check the Iowa state website. 

Retirees should keep in mind that property taxes in Iowa come in above the national median. The state sales tax rate is 6%, with local sales taxes ranging up to an additional 2%. Iowa also has its own tax on inheritances, with rates ranging from 1% to 2% in 2024 for brothers, sisters, son-in-laws and daughter-in-laws. Meanwhile, inheritance tax rates reach up to 3% for aunts, uncles, nephews, nieces, brother-in-laws and sister-in-laws. . However, the state inheritance tax will completely phased out by 2025.

Is Social Security taxable in Iowa?

No, Social Security benefits are not taxed in Iowa.

Are other forms of retirement income taxable in Iowa?

Anyone 55 and older is exempt from paying state taxes on income from a 401(k), IRA, pension or annuity. Beneficiaries of inherited retirement plans may also qualify for a tax break, including surviving spouses or other survivors with an "insurable" interest in the person who died. 

How high are property taxes in Iowa?

The median effective property tax rate in the Hawkeye State is 1.56%. But while rates are relatively high, the median property tax bill ($2,522) is less than the national median (2,869). That’s because home values in Iowa are quite a bit lower than the national median.

What is the Iowa homestead credit?

The homestead credit is a form of property tax relief available to all Iowa homeowners who occupy their property as a permanent residence. It is a subtraction of $4,850 from assessed value. The state also offers a homestead tax exemption for people 65 and older. For 2024, this exemption is worth $6,500 in addition to the basic homestead credit. 

How high are sales taxes in Iowa?

The state sales tax rate in Iowa is 6%, which is about average. All but 18 counties collect an additional local sales tax. So in practice, the average statewide rate is closer to 7%. Residents of Iowa benefit from sales tax exemptions on food, prescription drugs and some types of non-prescription medication.

What other Iowa taxes should I be concerned about?

Iowa does have a state inheritance tax. However, the law is scheduled to be fully repealed by Jan. 1, 2025. Tax rates will gradually decrease annually until then.

The Iowa inheritance tax does not apply to lineal descendants (children, grandchildren, great-grandchildren, etc.), but does apply to other types of relatives. Siblings who receive an inheritance will face rates ranging from 1% to 2%. The highest tax rate is applied to the portion of an inheritance that exceeds $150,000 in value. 

Nieces, nephews, aunts, uncles, cousins and all unrelated relatives face rates between 2% and 3%. The highest rate is applied to the portion of an inheritance that exceeds $100,000 in value.

There are two important considerations in relation to this inheritance tax. The first is that estates with a net value of less than $25,000 are not subject to the tax. The second is that, while Iowa does not have a gift tax, gifts made within the three years prior to the decedent’s death may be subject to the inheritance tax.