Minnesota Retirement Taxes: Your Planning Guide for 2026
- Will Grant
- Nov 14
- 12 min read
Updated: 2 days ago
Planning for retirement is about more than just saving money. It's also about understanding how taxes will affect your future income. If you're searching for information on Minnesota retirement taxes, you're likely wondering how Social Security, pensions, 401(k) withdrawals, and even property or estate taxes could impact your financial security.
This guide is designed to provide you with a clear understanding of what to expect, so you can feel more confident about your retirement plans in Minnesota.
Will Grant is a Senior Wealth Manager with 360 Financial. He earned a Bachelor of Science degree in Finance from Miami University and holds his Series 7 and 63 licenses through LPL Financial and his 65 license through 360 Financial.
Table of Contents
Key Points about Minnesota Retirement Taxes
Minnesota taxes most retirement income, including Social Security, pensions, and withdrawals from 401(k)/IRA accounts.
Minnesota's average income tax rate ranges from 5.35% to 9.85%, depending on income.
Property taxes typically average around 1% of a home's value, and seniors may qualify for refunds or deferrals.
Minnesota municipal bonds offer one of the few sources of tax-free income at the state and federal levels.
Estate taxes start at $3 million per person, so high-net-worth residents should plan early.
Is Minnesota a Tax-Friendly Place for Retirees to Live?
Minnesota isn’t known for being a retiree-friendly state when it comes to taxes.
Most retirees are surprised to learn that Minnesota taxes Social Security benefits, pensions, and IRA or 401(k) withdrawals. When you start withdrawing money from your retirement accounts, Minnesota wants a piece of that income. The same applies to most other retirement income sources, unless you have served in the military.
If you’re planning to retire in Minnesota, you have to be aware that most income sources are taxed at both the federal and state levels. Understanding that reality early allows you to work with your Minnesota financial advisor to build a strategy that minimizes the impact of taxes.
At 360 Financial, we help clients create income streams that Minnesota can’t tax. One of the most effective tools can be Minnesota municipal bonds, which generate tax-free interest at both the state and federal levels. For high-income retirees, that means you can earn investment income that doesn’t increase your tax bill.
In a state that isn’t especially friendly to retirees, finding those tax-advantaged strategies makes a big difference in how long your assets last.
What Should High-Net-Worth Minnesotans Know About Retirement Taxes?
If you’re a Minnesotan with a high net worth, there are three key things to know.
First, most of your retirement income, including Social Security, pensions, and IRA distributions, is taxable. This means that tax planning and strategy are critical. Second, Minnesota also has an estate tax. If your estate is above $6 million for a married couple, the state will take a share. Third, charitable giving can be a powerful tool to reduce your taxes while supporting causes you care about.
One effective way to do this is through a donor-advised fund. By donating highly appreciated stock to a fund, you receive a deduction for the full market value and avoid paying capital gains. You can then make charitable donations over time and even involve your children in deciding where those funds go. It’s a meaningful way to give back while reducing your taxable income.
Regardless of the strategies you use, keep in mind that estate planning is critical in Minnesota. Your financial advisor should act as your guide, ensuring your estate plan is up to date annually.
Client Story: Using a Donor-Advised Fund to Save on Taxes
In this client story, I’m going to share with you how using a donor-advised fund can help reduce your tax bill and create a meaningful family legacy.
One of my clients was in her peak earning years and received a large bonus.
Charitable giving was already part of her family’s values, so we opened a donor-advised fund using her highly appreciated stock. This allowed her to take a deduction for the full value of the stock, thereby avoiding capital gains taxes.
Today, she and her family love seeing that account grow even as they make donations each year. Their daughter is involved in choosing which local organizations to support, from nature programs to the volunteer fire department. It has turned into something much more than a tax strategy.
It’s become a family tradition of giving back to their community.
Key Considerations for Executives Nearing Retirement in Minnesota
For executives, two main areas of tax planning stand out: deferred compensation and stock options.
Deferred compensation allows you to delay part of your income until a future year (often in retirement) when you’ll likely be in a lower tax bracket. Stock options require even more planning. Non-qualified stock options are taxed at ordinary income rates on the “bargain element,” which is the difference between your strike price and the market value when you exercise. That can result in a large tax bill if not timed properly.
Some executives have only 90 days after retiring to exercise all outstanding options, which can result in everything being taxed in a single year. Strategically retiring at the end of the year can let you spread those exercises (and the taxes) over two years.
However, these are details you don’t want to navigate alone. The right timing and strategy can save tens of thousands in taxes. I recommend working with a wealth management firm that can help you develop effective tax strategies.
What Tax Breaks and Deductions Are Available for Seniors in Minnesota?
1. Key Healthcare and Medical Expense Tax Deductions and Credits
When you retire in Minnesota, many medical and long-term care costs can lower your taxable income. You may deduct medical expenses on your Minnesota return if they exceed 10% of your federal adjusted gross income.
Also, Minnesota offers a credit for long-term care insurance premiums to those who qualify. The credit equals 25% of eligible premiums, up to $100 per individual or $200 for married couples filing jointly.
Sources:
2. Minnesota Senior Citizens Tax Credit
If you’re age 65 or older (or permanently and totally disabled), you may qualify for Minnesota’s “age 65 or older or disabled” subtraction, which lowers your Minnesota taxable income even if you don’t claim the federal credit.
This type of deduction helps mitigate the tax burden on retirement income, including pensions and Social Security benefits.
However, you must meet certain income requirements.
3. Homestead Credit Refund
As a retiree, if you’re a homeowner in Minnesota and your property taxes are high relative to your income, you may qualify for the Homestead Credit Refund program.
This refund helps reduce the after-tax burden of housing costs, making retirement in Minnesota more affordable. There are certain income-level requirements to qualify for the refund. To get the most up-to-date information, visit the MN Department of Revenue website.
Source: Homestead Credit Refund
4. Senior Citizens Property Tax Deferral Program
If you’re 65 or older and your total household income is $96,000 or less (2025), Minnesota allows you to defer a portion of your homestead property taxes through the Senior Citizens Property Tax Deferral Program. Under this program, you pay a capped share of the taxes (typically up to 3% of income), and the rest is deferred with interest, allowing you to remain in your home with lower annual tax outflow.
How I Help Clients Create Tax-Free Income Streams in Minnesota
One of the most effective ways to create income that isn’t taxed by Minnesota or the federal government is through Minnesota municipal bonds.
These are bonds issued by the state or local counties to fund projects like infrastructure or community programs. For Minnesota residents, the interest you earn from these bonds is tax-free at both the state and federal levels.
That makes these bonds a strong option for high-income retirees who are already paying some of the highest tax rates in the country.
Instead of generating more taxable interest income, municipal bonds can give you a reliable stream of tax-free cash flow.
Tax Treatment of Common Income Sources in Minnesota
Are Social Security Benefits Taxable in Minnesota?
Minnesota taxes Social Security income in accordance with federal rules, but allows a subtraction that can reduce or eliminate the tax. Retirees with moderate or high income may still owe state tax on part of their benefits, while lower-income retirees often pay none.
According to the Minnesota Legislature website, "Minnesota’s income tax incorporates the federal exemption and provides an income-tested state subtraction that exempts from state tax part or all of the taxpayer’s benefits that are subject to federal tax. For tax year 2025, the subtraction begins to phase out at $108,320 of adjusted gross income (AGI) for married joint returns and $84,490 of AGI for single and head of household returns. These thresholds increase each year based on inflation."
Are Pensions Taxed in Minnesota?
Minnesota taxes most pension income from both public and private sources. Federal, state, and local government pensions are generally taxable.
However, military retirement pay and certain railroad retirement benefits are fully exempt from taxation. Some public pensions not covered by Social Security also qualify for a partial exemption, which is capped at “$25,000 of pension income for married joint returns.”
For the full list of exemptions, visit the Minnesota Legislature website.
Source: Tax Treatment of Pensions
Are 401(k) and IRA withdrawals Taxable in Minnesota?
Withdrawals from traditional 401(k) plans, IRAs, and other tax-deferred retirement accounts are fully taxable in Minnesota. These distributions are treated as ordinary income for state tax purposes. Roth withdrawals remain tax-free if they meet federal withdrawal requirements.
How Is Investment Income Taxed in Minnesota?
Interest, dividends, and capital gains are taxable at regular Minnesota income tax rates. Minnesota also taxes income from taxable bonds and mutual funds. However, interest from Minnesota municipal bonds is exempt from both state and federal taxes.
How Does Minnesota Tax Part-Year Residents?
Part-year residents pay Minnesota income tax on all income earned while living in the state and on income sourced to Minnesota, such as wages or property gains.
Anyone who spends 183 days or more in Minnesota during the year is generally considered a resident for tax purposes and must report all taxable income to the state.
Source: 183-day rule
Strategies to Reduce Minnesota Retirement Taxes
Shift more income to tax-exempt sources like Minnesota municipal bonds.
Use charitable giving or donor-advised funds to offset large income years.
Consider Roth conversions before retirement.
Maintain detailed medical expense records for deductions.
Explore relocation or part-year residency if appropriate.
Estate Taxes in Minnesota
Minnesota has a separate estate tax that applies to estates exceeding $3 million per person.
Rates range from 13% to 16%. Proper planning, which includes lifetime gifting or establishing irrevocable trusts, can help reduce or eliminate Minnesota estate tax exposure for larger estates.
If your total assets, including real estate, investments, and retirement accounts, approach this threshold, estate tax planning should be part of your financial strategy.
A financial advisor can coordinate with your estate attorney to ensure your plan meets both state and federal requirements.
The First Question Most Retirees Ask: Have I Saved Enough?
When people come in for retirement planning, the first concern they raise is simple: “Have I saved enough?”
For decades, their paychecks covered all their expenses. Suddenly, that stops—and they have to rely entirely on their investments and savings to fund their lifestyle.
At 360 Financial, we run thousands of different trials using varying investment returns and inflation rates to see how long a client’s savings can last. Our goal is to see at least a 90% probability of success when creating an investor's LifeWealth Plan. Once we know their plan is strong, we shift to the practical side: how to withdraw money each year in the most tax-efficient way.
For example, if someone’s expenses are $100,000 annually and Social Security or income sources cover $60,000, that leaves a $40,000 shortfall. My job is to determine the smartest way to fill that gap while keeping the client's tax bill as low as possible.
We typically set up withdrawals from conservative assets and closely monitor everything, as the goal is to see the portfolio continue to grow faster than the withdrawal rate.
Common Questions about Taxes and Retirement
Evaluating Minnesota as a Retirement Destination
Is Minnesota a good state for retirement?
Minnesota offers strong healthcare, safety, and community support, but has relatively high income and property taxes. It’s best suited for retirees who value services and stability more than low taxes.
Does Minnesota have tax breaks for seniors?
Yes. Seniors may qualify for deductions for medical expenses, the age 65 subtraction, and property tax credits or deferrals that reduce housing costs.
What is the median property tax in Minnesota?
According to the Tax Foundation, Minnesota’s effective property tax rate in 2023 was 0.99%. According to World Population Review, median property taxes in Minnesota vary widely by county. The county with the highest median property taxes is Carver County, at $4,380 per year in 2025, while Traverse County has the lowest median property taxes at $1,070 per year.
How high is the sales tax in Minnesota?
The local sales tax rate for the state of Minnesota is 6.875%. Cities and counties can impose local taxes, which raises the total to roughly 7.5–8.4% in many areas. Groceries, prescription drugs, and most clothing are exempt, helping retirees manage day-to-day expenses.
Understanding Minnesota Retirement Taxes
Is retirement income taxed in Minnesota?
Yes. Most retirees in Minnesota pay income tax on their Social Security benefits, pensions, and traditional IRA or 401(k) withdrawals.
What counts as taxable income for retirees in Minnesota?
Taxable income includes Social Security (partially), pensions, IRA, and 401(k) withdrawals, wages, dividends, and capital gains. Most retirement income sources are subject to state income tax.
How is adjusted gross income calculated for Minnesota retirees?
It starts with federal adjusted gross income, including all taxable income, then Minnesota applies specific additions and subtractions, such as the Social Security subtraction or the age 65 subtraction.
What do you not pay taxes on in Minnesota?
Interest from Minnesota municipal bonds, qualifying Roth withdrawals, and military retirement pay are not taxed. Basic groceries, prescription drugs, and most clothing are also exempt from sales tax.
Taxes on Common Retirement Income Sources in Minnesota
How much will my Social Security be taxed in Minnesota?
It depends on income. Lower-income retirees may pay no state tax on benefits, while higher-income retirees can owe tax on up to 85% of their Social Security income.
Is MN going to stop taxing Social Security?
As of 2025, Minnesota still taxes Social Security benefits, though recent proposals have aimed to phase this out. Any change would require new legislation.
How much does Minnesota tax pensions?
Pension income is taxed at regular Minnesota income tax rates, ranging from about 5.35% to 9.85%. Only military pensions and certain railroad benefits are exempt.
Do you have to pay taxes on 401(k) distributions in Minnesota?
Yes. Traditional 401(k) and IRA withdrawals are fully taxable as ordinary income when you take them out.
Big-Picture Questions About Retirement & Taxes
What is the most tax-friendly state for retirees?
States like Florida, Wyoming, South Dakota, and Nevada are generally considered the most tax-friendly because they have no state income tax.
Which state doesn’t tax pensions?
Florida, Texas, Nevada, South Dakota, Washington, and Alaska have no state income tax and therefore do not tax pension income.
Which state doesn’t tax 401(k) withdrawals?
Any state without a state income tax—such as Florida, Texas, or Wyoming—does not tax 401(k) withdrawals.
In what states is Social Security not taxed?
Social Security benefits are fully exempt in 39 states, including Florida, Texas, Arizona, California, and Pennsylvania. Only 11 states, including Minnesota, still tax them in some form.
Other Articles and Guides
About the Author
William Grant
Will Grant enjoys empowering people to make informed decisions and seeing the positive impact his guidance can have on their lives.
Prior to joining 360, he spent seven years serving hundreds of clients at a boutique RIA focused on healthcare executives with equity compensation and then at a large, independent RIA. He earned a Bachelor of Science degree in Finance from Miami University and holds his Series 7 and 63 licenses through LPL Financial and his 65 license through 360 Financial.
Will lives in Minneapolis with his fiancée, Melissa. In his free time, he enjoys competing in triathlons, golfing and is an active member of the Minnesota Leadership Council for the Chick Evans Scholarship Foundation, of which he was a recipient.
Schedule a Call
At 360 Financial, our clients come first. You deserve personalized attention. You’ll be happier and more confident in your financial future when you have an advisor who always puts your needs and best interest first. Schedule a 15-minute introductory call with a 360 financial advisor to see how we can help with your retirement, succession, tax, and estate planning.
About 360 Financial
360 Financial is an independent wealth management firm with a team of specialized financial advisors and financial planners. As fiduciaries, 360 Financial’s advisors provide services to business owners, entrepreneurs, and professionals. We help investors with sudden wealth, retirement planning, tax planning, estate planning, and business financial planning.
Headquartered in Minnesota, we serve investors across the US with online and in-person wealth management and financial planning services.
Stock investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA
