The Plan to Make All Your Retirement Income Tax-Free Just Stalled

What This Bill Actually Does

Right now, if you are 55 or older in Colorado, the state gives you a nice break on your state income taxes for your retirement income. But there are strict limits. Under current law, folks aged 55 to 64 can deduct up to $20,000 of pension and annuity income, while those 65 and older can deduct up to $24,000. (There are also some special rules that let you fully deduct Social Security, but other retirement accounts remain capped). House Bill 26-1062 proposed tearing the roof off those limits entirely.

Starting in tax year 2027, this legislation would have allowed anyone 55 or older to subtract all of their federally taxable pension and annuity income from their Colorado taxable income. The bill's text specifically defined this to include Public Employees' Retirement Association (PERA) benefits, distributions from traditional 401(k)s and IRAs, self-employed retirement accounts, military pensions, and fully matured privately purchased annuities. If it counted as standard retirement income on your federal return, Colorado wouldn't touch a dime of it.

The goal was straightforward: make Colorado a more attractive state for retirees and help older residents keep up with the rising cost of living. However, because income tax in Colorado is tied to several other funding buckets, removing this revenue meant less money flowing into the State Education Fund and state-funded affordable housing programs. It also created a complex domino effect: by reducing state revenue so drastically, the bill would have automatically triggered the suspension of other vital tax credits under the state's budget formulas, pitting different generations of taxpayers against each other.

What It Means for You

If you are nearing retirement or already there, this bill would have been a direct, substantial boost to your bottom line. The state's financial analysts projected that in 2027, roughly 610,000 taxpayers would have saved an average of $869 a year under this plan. For high-earning retirees pulling six figures from pensions or 401(k) distributions, the savings would have been much higher, since 100% of those funds would suddenly be sheltered from the state's flat 4.4% income tax rate.

For younger families and working professionals, the impact would have been felt quite differently. Because of how Colorado's tax code is wired, dropping state revenue by hundreds of millions of dollars triggers an automatic freeze on other tax breaks. Specifically, the state projected that passing this bill would make the family affordability tax credit and the expanded earned income tax credit completely unavailable in 2027 and 2028. In short: older Coloradans would have seen a permanent tax cut, while lower- and middle-income working families with kids would have immediately lost theirs.

Because this bill just died in committee, your tax situation remains unchanged for now. Keep planning your retirement withdrawals around the existing $20,000 and $24,000 deduction caps.

• Check your current withholdings: Talk to your CPA to ensure you are maximizing the existing $24,000 deduction if you are over 65, especially if you are balancing part-time work with IRA distributions.
• Watch the Social Security rules: Remember that under current law, you can already deduct the full amount of your Social Security benefits if you are 65+, or if you are 55-64 and meet certain income thresholds ($75,000 single / $95,000 joint). Don't leave that money on the table.

What It Means for Your Business

While HB26-1062 was fundamentally an individual tax bill, business owners—especially those in wealth management, financial planning, and real estate—need to pay attention to the ripple effects of this debate. If Colorado ever passes a total tax exemption for retirement income, it drastically changes the math for high-net-worth clients deciding whether to retire here or flee to zero-income-tax states like Texas, Florida, or Wyoming. To put the market in perspective: in tax year 2023, nearly 574,000 Coloradans claimed $14.3 billion in pension and annuity deductions. A totally tax-free retirement environment would likely spur massive demand for local real estate, particularly in 55+ communities and the luxury housing market.

On the compliance and HR side for everyday employers, nothing changes right now. Because the bill failed, you don't need to adjust how you counsel retiring employees or how you structure deferred compensation and severance packages. However, you should be aware that the state is facing severe budget pressures that are currently pitting different tax credits against each other. The failure of this bill means the family affordability tax credit remains intact for your working-class employees, which can be a vital piece of their overall financial stability and retention.

Even though the bill is dead, the conversation about keeping affluent retirees in Colorado isn't over. Keep an eye on how the legislature balances this in the future.

• Update your client advisories THIS WEEK: If you are a financial advisor or wealth manager, proactively let your clients know that the legislative push for unlimited retirement deductions failed this year. Advise them to stick to their current tax-advantaged withdrawal strategies.
• Review your benefits packages: With state-level retirement tax breaks staying capped, your company's matching contributions to 401(k)s and Health Savings Accounts (HSAs) remain the absolute best way to help employees build wealth. Make sure your recruiting materials highlight these benefits.

Follow the Money

The fiscal note on this bill is a masterclass in how complicated Colorado's budget has become. By wiping out the retirement income tax cap, the state projected a massive $530 million reduction in direct revenue for tax year 2027. Once fully implemented, it would have cost the state roughly $565 million annually. That money would have been siphoned directly away from the General Fund, the State Education Fund (losing about $40.8 million by FY28), the newly created Kids Matter Account, and Proposition 123 affordable housing funds (losing over $12 million by FY28).

But here is the wild part of the math: because the revenue drop was so steep, it would have triggered the automatic suspension of the family affordability tax credit and expanded earned income tax credit. Ironically, turning off those family credits would have saved the state so much money that the bill mathematically showed a net revenue increase of $42.7 million in its first year, before plunging into a $58 million deficit the next year. It also would have wildly fluctuated our TABOR refunds, bumping them up slightly in 2027 before shrinking them in 2028. It's a textbook example of how pulling one lever in Colorado's tax code accidentally yanks three others, making sweeping tax cuts incredibly difficult to pass.

Where This Bill Stands

House Bill 26-1062 was introduced on January 14, 2026, by Representative Ron Weinberg and assigned to the House Finance Committee. That is exactly where it met its end. On February 9, 2026, the committee voted to Postpone Indefinitely (PI) the measure—Capitol jargon for officially killing the bill for the year.

Why did it die? Simply put, the half-billion-dollar annual price tag was too heavy a lift for a legislature currently fighting over every dime of the state budget. Furthermore, the revelation from the fiscal note that helping retirees would automatically trigger the loss of tax credits for lower-income working families made it politically toxic. This specific proposal is dead for the 2026 session, but expect lawmakers to bring a watered-down version of it back next year, likely proposing a gradual increase to the deduction caps rather than trying to blow them up all at once.