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State Taxes (PA) and IRA
Old 04-04-2017, 12:44 PM   #1
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State Taxes (PA) and IRA

Working on the taxes and it looks like we are going to owe state tax due to interest income on some taxable accounts. This is the first time it has happened and first time we had significant interest income. One is from CDs we got this year and the other is from a taxable brokerage account opened in past year or so.

Question - should we move as much as we can to an IRA to shield us from the state taxes? We are 58 and 65 and have 401ks.

Thanks!!
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Old 04-04-2017, 01:11 PM   #2
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At a state income tax rate of 3.07%, it's not a real big deal. And if your PA taxable income, assuming your a couple with no kids at home, is less than $15250, you may be eligible for the PA Tax Forgiveness Credit.


That said, PA does not tax normal distributions from retirement accounts (1099R, box 7 coded a 7). But you need to have earned income to move money into a retirement account, that mean w*rk!
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Old 04-04-2017, 04:12 PM   #3
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IRA contributions are not deductible in PA. You have to pay taxes on that income, even if you get the federal deduction by contributing to a tIRA.

The upside comes when, as RE2 Boys notes, you do not pay state income tax on the IRA withdrawals (1099R code 7)
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Old 04-04-2017, 05:16 PM   #4
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3% state tax is cheap, quite possibly you are paying 10% on the Fed side for the interest.

So lets pretend you have $10,000 in a CD earning 2%
Gross is: $200 interest.
Fed tax is: $20
PA tax is: $6
You net $174 (an effective interest rate of 1.74%).

You could move to a State that does not tax income, there are about 7 of them, example FL.
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Old 04-04-2017, 05:26 PM   #5
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Originally Posted by Philliefan33 View Post
IRA contributions are not deductible in PA. You have to pay taxes on that income, even if you get the federal deduction by contributing to a tIRA.

The upside comes when, as RE2 Boys notes, you do not pay state income tax on the IRA withdrawals (1099R code 7)
This is going to work out well for me if I can time it right. All the money in the IRA (rolled over from a 457) went in tax-free where I earned it in MD. MD does tax IRA distributions, as does WV where we live now. I haven't taken anything out yet. We hope to move to a CCRC in PA about the time or shortly after I have to start taking RMDs. So I may pay little or no state income taxes on the funds in the IRA.

Now I hope nobody comes along and busts my bubble by telling me there's a "gotcha" in this plan.
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Old 04-04-2017, 05:36 PM   #6
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This is going to work out well for me if I can time it right. All the money in the IRA (rolled over from a 457) went in tax-free where I earned it in MD. MD does tax IRA distributions, as does WV where we live now. I haven't taken anything out yet. We hope to move to a CCRC in PA about the time or shortly after I have to start taking RMDs. So I may pay little or no state income taxes on the funds in the IRA.

Now I hope nobody comes along and busts my bubble by telling me there's a "gotcha" in this plan.
Yeah, they do actually. I think there is an exclusion for workplace savings plan distributions for age >65 but it is offset by SS payments (I think).
Nevermind...totally misread that.
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Old 04-04-2017, 06:24 PM   #7
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My thought was that anything we could get into an IRA, would avoid any tax on interest in future years and avoid state tax when withdrawn. I did work for about 8 weeks this year and DH is still working.

Something isn't adding up right. Turbo Tax is telling me we owe $1500 more on state taxes. I am thinking there is only about 5 or 6k that didn't have state tax taken out first.
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Old 04-06-2017, 09:34 AM   #8
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Ok.. I have finally figured it out. I had the state type code for my pension (first year with it). There is no state tax on that income. Whew! That knocked state tax owed down to $150.
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Old 04-06-2017, 01:02 PM   #9
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I'd be jumping for joy if my state tax was 3.07%. I was born and raised in PA, but now live in the peoples republic of NY.
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