Pennsylvania Retirement Investment Taxation

Did you know Pennsylvania taxes pre-tax retirement assets differently than many other states?

How Pre-Tax Retirement Account Contributions Are Taxes

When you contribute to your pre-tax 401k or IRA, you may reduce your taxable income or receive a federal income tax deduction, but your Pennsylvania state income will not be reduced. Thus, you are deferring your federal income tax but paying your Pennsylvania income tax in the year of contribution.

How Retirement Account Withdrawals Are Taxed

Once you are retired (age 59.5 or higher), you can withdraw your pre-tax 401k and IRA assets penalty-free. You will pay federal income tax on these withdrawals, but you will not pay Pennsylvania state income tax.

Why Retirement Taxation Matters to You

If you are moving between states at any point in your life, you should know how your contributions are taxed and how withdrawals are treated.

Here are a few state tax examples for retirement planning. Which one applies to you?

1. You live in a state that does not tax contributions or withdrawals (e.g., Florida) for your life. In this case, you never pay state income tax on these contributions.
2. You live in a state that provides a state income reduction for 401k/IRA contributions (e.g., Vermont), and you move to a state in retirement that does not have tax withdrawals (e.g., Pennsylvania). In this case, you never pay state income tax on these contributions, and you even get an extra deduction/reduction up front, a form of tax arbitrage.
3. You live in a state that does not provide a state income reduction for 401k/IRA contributions (e.g., Pennsylvania), and in retirement, you stay in Pennsylvania or another state that does not tax withdrawals (e.g., Florida). In this case, you get taxed upfront.
4. You live in a state that does not provide a state income reduction for 401k/IRA contributions (e.g., Pennsylvania), and you move to a state in retirement that does tax withdrawals (e.g., Vermont). In this case, you get double-taxed, which is not ideal.

Examples 1 and 2 above are ideal because they minimize your state income tax burden.

Example 3 acts almost like an after-tax (Roth) account in that you pay the state tax up front, but you aren’t taxed again in retirement.

Example 4 is the worst-case scenario because you are taxed on both ends.

Takeaways

Tax planning is complex, and laws are ever-changing at the federal, state, and local levels. As you prepare for retirement, it is essential to consider the taxation of your investments, Social Security, etc. to make informed decisions. We recommend confirming your complex investment tax questions with your CPA or accountant.

The One Day In July office in Wayne, Pennsylvania provides investment management services as fee-only fiduciary financial advisors to the greater Philadelphia area, the Main Line, and surrounding communities, including Villanova, Radnor, St. Davids, Wayne, Strafford, Chesterbrook, Devon, Berwyn, Paoli, Malvern, King of Prussia, Valley Forge, Havertown, and more.

If you need assistance navigating the taxation of your Pennsylvania retirement investments, contact us today to set up a free consultation. We can meet in person if you're in the area or set up a phone call or Zoom meeting if you prefer.