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Effective January 1, 2025, Connecticut no longer requires state income tax withholding on most retirement income distributions (pensions and annuities). Withholding remains mandatory only for lump sum distributions defined as amounts exceeding $5,000 or more than 50% of the payee's entire account balance, whichever is less. Payees may still elect voluntary withholding via Form CT-W4P. This change affects payers of pension and annuity income, who must update their withholding procedures while continuing to remit withheld amounts electronically and file annual reconciliation by January 31.
Connecticut eliminates withholding on most retirement distributions effective January 1, 2025
Effective January 1, 2025, Connecticut no longer requires state income tax withholding on most pension and annuity distributions. Withholding remains mandatory only for lump sum distributions—defined as amounts exceeding USD 5,000 or more than 50% of the payee's entire account balance, whichever is less.
Who is affected
This change affects all payers of pension and annuity income in Connecticut, including employers, third-party payroll providers, and employee outsourcing (EOR) platforms managing retirement distributions for Connecticut residents. Payees receiving periodic retirement income are no longer subject to automatic withholding but may elect voluntary withholding by submitting Form CT-W4P.
What's changing
| Before January 1, 2025 | After January 1, 2025 |
|---|---|
| State income tax withholding required on all pension and annuity distributions | Withholding eliminated for periodic distributions |
| Mandatory withholding applied broadly | Mandatory withholding applies only to lump sum distributions exceeding USD 5,000 or 50% of account balance, whichever is less |
| Payees could request exemption via Form CT-W4P | Payees may elect voluntary withholding via Form CT-W4P |
Remittance and reconciliation requirements remain unchanged. Payers must continue to remit withheld amounts electronically according to their remitter classification (weekly, monthly, or quarterly) and file annual reconciliation by January 31, 2026, using Form CT-945 and Form CT-1096.
What NEO partners and clients should do
- By January 1, 2025: Update withholding systems to exclude periodic retirement distributions from Connecticut state income tax withholding.
- By January 1, 2025: Configure payroll systems to identify and withhold on lump sum distributions meeting the USD 5,000 or 50% threshold.
- Ongoing: Make Form CT-W4P available to payees who wish to elect voluntary withholding on periodic distributions.
- By January 31, 2026: File Form CT-945 and Form CT-1096 electronically to reconcile 2025 withholding.
Sources
- Connecticut Department of Revenue Services, Nonpayroll Withholding Tax Information
https://portal.ct.gov/drs/withholding-taxes/nonpayroll/nonpayroll-withholding-tax-information
