If you’re retired in Michigan and taking money from a traditional IRA, an important tax change could reduce your state income tax bill in 2026.
Michigan’s retirement income deduction is now fully phased in, allowing many retirees to exclude more qualifying retirement income from Michigan taxation. For families with substantial IRA balances, this creates another opportunity to review how much you withdraw, when you withdraw it, and whether strategies such as Roth conversions make sense.
How Much More of Your IRA Withdrawal Can Michigan Exclude?
Michigan has gradually expanded its retirement and pension income deduction over the past several years.
In 2025, eligible retirees generally had access to 75% of the full phase-in deduction. In 2026, that increases to 100%. For married couples filing jointly, the maximum 2026 retirement income deduction is $135,220. For single filers, it is $67,610.
The Michigan Department of Treasury’s retirement guidance explains the phase-in and eligibility requirements in greater detail. In plain English, this means more of a qualifying IRA withdrawal may escape Michigan income tax in 2026. It does not mean the withdrawal becomes tax-free federally.
What Could This Mean for a Couple Taking $160,000 From Their IRAs?
Consider a retired Michigan couple filing jointly who takes $160,000 in qualifying traditional IRA distributions and has no other retirement income using the deduction.
For illustration:
The 2026 change reduces their Michigan taxable retirement income by $36,374.
At Michigan’s current 4.25% income tax rate, that difference could represent approximately $1,546 less in Michigan income tax, before considering other income, deductions, exemptions, or credits.
For households taking sizable retirement distributions each year, that is meaningful enough to include in year-end planning.
Could 2026 Be a Better Year for a Roth Conversion?
The expanded deduction may also affect the calculation around Roth conversions.
Michigan states that if you are at least age 59½, a qualifying traditional IRA-to-Roth IRA conversion may be treated as retirement income and deducted within the applicable Michigan limits.
That could allow part or all of a Roth conversion to receive favorable Michigan tax treatment.
The federal rules are different. The taxable portion of a traditional IRA converted to a Roth generally remains taxable as federal income.
That makes the decision less about simply saving Michigan tax and more about determining whether paying federal tax today may help reduce future required minimum distributions and create a larger pool of tax-free assets later.
Remember That Federal Taxes and Medicare Still Matter
Taking more from an IRA because Michigan taxes it more favorably can still increase your federal income.
That additional income may affect:
- Your federal income tax bracket
- How much of your Social Security is federally taxable
- Taxes on other investment income
- Future Medicare Part B and Part D premiums
Medicare is particularly easy to overlook. The Social Security Administration generally uses income from two years earlier when determining whether higher-income beneficiaries owe IRMAA.
In most cases, that means additional income recognized in 2026 could affect Medicare premiums in 2028.
What Should You Review Before Year-End?
Rather than looking at the Michigan deduction by itself, consider how it fits into your broader retirement income plan.
A few questions worth reviewing include:
- Is there an opportunity to take additional IRA income while receiving more favorable Michigan tax treatment?
- Would a Roth conversion make sense before future RMDs increase taxable income?
- Are you close to a federal tax or future IRMAA threshold?
- If you are already taking RMDs, could a qualified charitable distribution help accomplish your charitable goals while managing taxable income?
- How should IRA, Roth, and taxable investment accounts work together to fund your spending needs?
For families with significant assets, these decisions are often best considered together. We’ve written previously about the value of coordinating tax, investment, retirement, and other financial decisions before acting.
Take Advantage of the Change Without Creating Another Tax Problem
Michigan’s 2026 rules give many retirees more room to take qualifying retirement income without paying Michigan tax on the full amount.
That can create useful planning opportunities, especially for households with significant traditional IRA balances.
Before changing your withdrawals or completing a large Roth conversion, however, look at the full impact. A decision that saves Michigan tax this year may still affect federal taxes, Medicare premiums, and your long-term retirement income strategy.
About Eric
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a CERTIFIED FINANCIAL PLANNER® professional and a Chartered Retirement Planning Counselor℠. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. To maintain his CFP® certification, Eric must meet CFP Board’s ethical standards and complete at least 30 hours of approved continuing education every 2 years, including 2 hours of ethics education.
