How 4 U.S.C. § 114 Protects Nonresident Retirement Income

The Federal Source Tax Act, codified at 4 U.S.C. § 114, prevents any state from taxing the retirement income of someone who no longer lives there.¹ If you spent your whole career in one state and then moved, that former state cannot reach back and tax your pension, 401(k), or IRA distributions. The protection is broad, but it only covers specific categories of retirement income, and it does nothing to stop your new state from taxing you under its own rules.

What the Law Actually Does

The rule is short and firm. A state may not impose income tax on the retirement income of any individual who is not a resident or domiciliary of that state.¹ Because this is a federal statute, it overrides any state tax code that would try to claim retirement income based on where it was earned. Congress enacted it on January 10, 1996.²

Two things about the mechanics matter. First, whether you count as a nonresident is decided under the laws of the state trying to tax you, so the specific tests vary. Second, the statute defines “retirement income” narrowly. Distributions that fall outside its definitions get no federal shield at all.

Retirement Income That Is Protected

For the plans on the statute’s list, protection is automatic and there is no cap on distribution amounts or restrictions on how you take the money. A single lump-sum 401(k) withdrawal is protected the same way monthly pension checks are.¹

The covered plans are:

401(a) qualified trusts, which include traditional employer-sponsored pensions and 401(k) plans
403(a) and 403(b) annuity plans, common for public school employees and certain nonprofit workers
Simplified employee pensions under IRC section 408(k), often used by small businesses and the self-employed
Individual retirement plans defined by IRC section 7701(a)(37), which covers both traditional and Roth IRAs
Section 457 deferred compensation plans, used by state and local government employees and some nonprofits
Governmental plans under IRC section 414(d)
Section 501(c)(18) employee-funded pension trusts predating 1959

Military retirement pay is also expressly covered. Retired pay and retainer pay for members or former members of a uniformed service, computed under chapter 71 of title 10 of the U.S. Code, are treated as protected retirement income.¹ A retired service member who earned a pension while stationed in one state but now lives in another gets the same protection as any civilian retiree.

Nonqualified Deferred Compensation and Partnership Payments

Nonqualified deferred compensation, the kind often offered to executives above the standard 401(k) or pension limits, can be protected too. The catch: the payments have to be structured correctly.³ The distribution must satisfy one of two tests:

Periodic payment test. The money comes in substantially equal periodic payments, made at least once a year, over the recipient’s life expectancy (or a joint life expectancy with a designated beneficiary), or over a period of at least ten years.¹
Excess benefit plan test. The payment comes after employment ends under a plan maintained solely to provide benefits that exceed IRC caps such as sections 401(a)(17) or 415.¹

A lump-sum payout from a nonqualified plan that meets neither test loses federal protection entirely. In that case, the state where you earned the money can tax the full amount even after you leave. If you are negotiating an exit package with deferred compensation, the payment structure is not just a cash-flow choice; it decides which state gets to tax the money.

The statute allows some flexibility inside the periodic payment test. Adjustments under a predetermined formula that caps total disbursements are fine, and so are cost-of-living increases.⁴ Neither breaks the “substantially equal” requirement.

Retired partners in professional services firms and other partnerships get similar treatment, with partnership-specific conditions. There must be a written plan providing retirement payments in recognition of prior service, and it must be in effect immediately before retirement begins. The payments must also meet the same periodic payment test. A “retired partner” is someone who qualifies as a partner under IRC section 7701(a)(2) and who has retired under the partnership agreement.⁵ Payments that look like a distributive share of ongoing partnership income rather than retirement payments tied to past service do not qualify. Informal arrangements and plans created after retirement begins will not survive scrutiny.

Income the Act Does Not Cover

Several income sources retirees rely on fall outside the statute.

Social Security benefits are not listed in the statute’s definition of retirement income.¹ In practice this rarely causes trouble, because Social Security is administered federally and states that tax it do so based on residence rather than source. The safety here comes from how Social Security works, not from § 114.

Stock options and restricted stock units are not mentioned in the statute. States generally treat option and RSU income as compensation for services and allocate it to the state where you worked during the relevant period, typically from grant to exercise or vesting. If you left the state before your equity vested, that former state can still claim a proportional share.

Lump sums from nonqualified plans that fail both the periodic payment and excess benefit tests also fall outside the protection. A single large distribution from a nonqualified arrangement, without meeting either requirement, remains taxable by the state where you earned it.

Your New State Can Still Tax You

Section 114 blocks the old state. It does nothing to the new one. If you retire in one state and move to another that has an income tax, your new state can tax your retirement income the same way it taxes any resident’s income. The law prevents source-state taxation; it does not create a tax-free status for retirement money in general.

Nine states impose no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Moving from a taxing state to one of these leaves your retirement distributions untaxed on both ends: the former state is blocked by § 114, and the new state does not tax income at all. That combination explains a lot of retirement moves. Move to a state that does tax income, and expect your retirement distributions to be treated like any other resident income.

Establishing Nonresident Status

The whole protection turns on whether you are a nonresident of the state trying to tax you, and each state uses its own laws to decide.¹ Domicile is the central concept. Your domicile is the place you consider your permanent home and intend to return to when away, and changing it requires both physical relocation and evidence of intent.

Revenue departments look at concrete signals: voter registration, driver’s license, primary bank accounts, memberships, place of worship, and where your closest family lives. They also count days. Many states treat someone who spends more than 183 days in the state during a tax year as a statutory resident, regardless of stated domicile.

The moment that matters is when the retirement income hits your account. If you are a genuine nonresident at the time of distribution, the former state has no claim. Keep a house in the old state, spend summers there, and change little beyond your mailing address, and a revenue department will argue you never really left. Cutting ties cleanly makes the protection much easier to enforce.

Fixing or Preventing Wrong Withholding

Plan administrators sometimes keep withholding for a state you no longer live in, either because their records lag or because they default to the employer’s state. When that happens, you have to file a nonresident return with that state to get the money back. The federal law is on your side, but recovering the withheld amount is paperwork you have to do.

Prevention is easier. After you establish a new domicile, contact your plan administrator and ask what documentation is needed to stop state income tax withholding. Most states have a nonresident certification form for this purpose. Keep records of the move, including the date, your new voter registration, and your new driver’s license, so any later dispute with a state revenue department is straightforward to resolve.

1
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
2
Congress.gov. Public Law 104-95
3
U.S. Government Publishing Office. House Report 109-542 – State Taxation of Retirement Income
4
Office of the Law Revision Counsel. 4 US Code 114 – Limitation on State Income Taxation of Certain Pension Income
5
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income