Q: Let's say I worked and contributed to my retirement account in a state that gives seniors a small tax exemption on their distributions from retirement accounts. Then when I retire, I move to a state that offers retirees a much more generous tax exemption for these distributions. Which state's tax exemption applies to me -- the one where I earned my pension, or the one where I now reside? -- AP, via e-mail
A: The laws of the state you live in are the ones that apply to you. Isn't that one of the reasons you moved to that taxpayer-friendly state in the first place?
Money you take out of tax-deferred retirement accounts is always subject to federal income tax; but some states let you exclude part of your withdrawal from your taxable income.
In my own home state of New York, for example, people who are over age 59 and a half pay no state income tax on the first $20,000 of their annual pension income. You get that $20,000 exemption no matter where you earned your pension or contributed to your IRA. For the purposes of this particular law, 'pension income' means money that comes out of your employer-sponsored retirement accounts, such as an IRA, 401(k), or 403(b) plan, and from tax-deferred annuities. It doesn't include Social Security, which has its own exemption from both state and federal income tax.
IRA beneficiaries who live in New York state get the same tax break on inherited accounts, regardless of their own age, provided the retirement accounts' original owner was at least 59 and a half years old. But this state tax exemption applies per decedent, not per beneficiary. In other words, three beneficiaries of one decedent can only inherit one $20,000 annual exemption.
For more information about which states are the friendliest when it comes to income taxes, check out this excellent article from the Washington Post.
A: The laws of the state you live in are the ones that apply to you. Isn't that one of the reasons you moved to that taxpayer-friendly state in the first place?
Money you take out of tax-deferred retirement accounts is always subject to federal income tax; but some states let you exclude part of your withdrawal from your taxable income.
In my own home state of New York, for example, people who are over age 59 and a half pay no state income tax on the first $20,000 of their annual pension income. You get that $20,000 exemption no matter where you earned your pension or contributed to your IRA. For the purposes of this particular law, 'pension income' means money that comes out of your employer-sponsored retirement accounts, such as an IRA, 401(k), or 403(b) plan, and from tax-deferred annuities. It doesn't include Social Security, which has its own exemption from both state and federal income tax.
IRA beneficiaries who live in New York state get the same tax break on inherited accounts, regardless of their own age, provided the retirement accounts' original owner was at least 59 and a half years old. But this state tax exemption applies per decedent, not per beneficiary. In other words, three beneficiaries of one decedent can only inherit one $20,000 annual exemption.
For more information about which states are the friendliest when it comes to income taxes, check out this excellent article from the Washington Post.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.
(c) Lynn Brenner, All Rights Reserved
hi, I am a Florida resident working in NY. I want to know if I tap into my retirement IRA that is in a Florida bank would I have to pay NY state taxes on that withdrawal ? I file my taxes in NY every year because I work in NY like I said.
Posted by: Dino Zenonos | 01/20/2010 at 06:56 PM