Terraform state can contain sensitive data depending on the resources in-use and your definition of "sensitive." The state contains resource IDs and all resource attributes. For resources such as databases, this may contain initial passwords.
Some resources (such as RDS databases) have options for PGP encrypting the values within the state. This is implemented on a per-resource basis and you should assume the value is plaintext unless otherwise documented.
When using local state, state is stored in plain-text JSON files. When using remote state, state is only ever held in memory when used by Terraform. It may be encrypted at rest but this depends on the specific remote state backend.
It is important to keep this in mind if you do (or plan to) store sensitive data (e.g. database passwords, user passwords, private keys) as it may affect the risk of exposure of such sensitive data.
Storing state remotely may provide you encryption at rest depending on the backend you choose. As of Terraform 0.9, Terraform will only hold the state value in memory when remote state is in use. It is never explicitly persisted to disk.
For example, encryption at rest can be enabled with the S3 backend and IAM policies and logging can be used to identify any invalid access. Requests for the state go over a TLS connection.
Terraform Enterprise is a commercial product from HashiCorp that also acts as a backend and provides encryption at rest for state. Terraform Enterprise also knows the identity of the user requesting state and maintains a history of state changes. This can be used to provide access control and detect any breaches.
Long term, the Terraform project wants to further improve the ability to secure sensitive data. There are plans to provide a generic mechanism for specific state attributes to be encrypted or even completely omitted from the state. These do not exist yet except on a resource-by-resource basis if documented.
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