$10,000 a Year Tax on Retirement? New Report Shows How Even a Small Tax on Your Retirement Can Have Huge Impact on Your Finances

California politicians have tried five times in recent years to implement a tax that would cause Californians to delay retirement.

Annual asset tax would cut 401(k) retirement income by as much as 37%, while teachers, firefighters and other public employees would face hundreds of thousands of dollars in lifetime taxes on their pensions

Prop 42, which is backed by labor groups, public safety professionals, senior groups and more, would protect retirement and personal savings from any new state taxes

SACRAMENTO, Calif., Sept. 29, 2026 /PRNewswire/ -- A new economic study (LINK) finds that a California tax on retirement and personal savings would cost workers in the state hundreds of thousands of dollars over their lifetimes and force workers to wait years longer to retire. The study comes after six different recent attempts to pass new taxes on personal property such as retirement and savings accounts.

Nearly 80% of Californians have some form of retirement savings. Voters will decide this November whether to pass Prop 42, which protects retirement accounts, including 401(k)s, pensions, IRAs, and other retirement plans by prohibiting new taxes on personal property, including retirement and personal savings accounts.

The economic study details how even a 1% tax would significantly reduce retirement income and force some workers to remain on the job years longer before they can afford to retire, just as California continues to become less affordable for families. The analysis by Brad Williams, former chief economist and Director of Budget Overview and Fiscal Forecasting in the Legislative Analyst's Office, concluded that for workers with 401(k)s, a 1% tax would cut annual retirement income by 20 to 37 percent and cost anywhere from $226,763 to more than $1.2 million over a retiree's lifetime. The study found workers would need to work three to seven years longer just to get back to the retirement income they would have had without the tax.

"With the cost of living in California already squeezing families, the last thing workers need is to be taxed twice on the same retirement savings," said Lindsey Akason, a financial planner based in California. "For many workers, that erosion adds up to the difference between retiring on time and working years past when they'd planned."

Blue-collar workers, teachers, firefighters and others who rely on pensions would face substantial costs as well. The study estimates that a typical peace officer or firefighter would pay as much as $276,814 over their career and retirement under a 1% tax, with annual taxes exceeding $11,000 at retirement. A typical teacher would face as much as $261,737 in lifetime taxes, with the annual tax exceeding $10,000 at retirement.

"Californians already pay taxes on the money they earn. The state shouldn't be able to tax that money again simply because it's sitting in a retirement or savings account," said Robert Gutierrez, President of the California Taxpayers Association. "A new tax on Californian's retirement and life savings would be devastating. People spend decades planning and saving for retirement. The state shouldn't be able to change the rules after the fact."

Among the key findings:

• 401(k) retirement income would fall by as much as 37%. Workers who reduce contributions to pay the tax would see annual retirement income decline by 20% to 37%, with the steepest losses falling on moderate-income workers earning $72,000 to $156,000 late in their careers.
• Workers would owe up to $10,000 a year out of pocket. A worker in that same $72,000 to $156,000 range would face annual tax bills of up to $10,000 late in their career if they pay the tax directly rather than cutting contributions.
• Lifetime 401(k) costs would exceed $1.2 million. Depending on the worker and how the tax is paid, modeled lifetime costs range from $112,346 to more than $1.2 million.
• Some workers would have to work up to seven years longer. Workers who reduce their 401(k) contributions to cover the tax would need to delay retirement by an estimated three to seven years to restore their baseline retirement income, with building trades workers facing the longest delay.
• Firefighters and peace officers would pay more than $276,000. The study estimates cumulative lifetime taxes of $237,093 to $276,814 for representative CalPERS peace officer and firefighter members, with annual taxes reaching $10,208 to $11,296 at retirement.
• Teachers would pay more than $261,000. Representative CalSTRS members face an estimated $209,051 to $261,737 in cumulative lifetime taxes, with annual taxes reaching $8,224 to $10,297 at retirement.
• The burden continues after retirement. Because the modeled tax applies annually, workers continue paying it on remaining 401(k) assets or pension value throughout retirement.

Californians are on edge about their savings. Earlier this year, a statewide survey of California voters found significant anxiety about retirement security, with overwhelming majorities saying the state's high cost of living and taxes are making it harder to save for retirement. Voters also express widespread concern regarding potential new and retroactive taxes on retirement savings and the impact such taxes would have on when – or if – they can retire in California.

The survey presents an alarming picture of how retirement insecurity is affecting Californians across the state:

• Nearly seven in ten voters (69%) say it is harder to save for retirement today than it was five years ago.
• Two-thirds of voters (65%) lack confidence that they will be able to afford to retire comfortably in California, with one in six believing they will never retire.
• Nearly three-quarters (73%) of voters know someone who has had to delay retirement for financial reasons.
• Nearly three in five voters expect to need at least $1 million in savings to retire comfortably.

The findings come as Californians will decide in November whether to pass Prop 42, the Retirement & Personal Savings Protection Act, which would protect retirement savings and personal property from new state taxes. As families struggle to keep up with rising costs, recent legislative proposals have raised serious concerns about the future of retirement security in the state. Politicians have tried repeatedly to pass taxes on retirement and personal savings accounts, including AB 2088 (2019), AB 310 and ACA 8 (2021–22), and AB 259 and ACA 3 (2023–24). Prop 42 would protect the savings of Californians throughout the state.

Prop 42 is supported by a diverse coalition of groups across California, including the State Building and Construction Trades Council of California, the California Professional Firefighters (CPF), the Peace Officers Research Association of California (PORAC), California Senior Alliance, the California Small Business Association, Disabled American Veterans, Department of California, the California Multicultural Business Alliance, and others.

Learn more about Prop 42: the Retirement & Personal Savings Protection Act at YesonProp42.org.

Paid for by Yes on 42 – Protect Retirement & Life Savings, a coalition of retirees, blue-collar workers, seniors, veterans, small businesses & taxpayers. Committee's top funder: Building a Better California.

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