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.


Get Started Today.

Please enter a first name.
Please enter a last name.
Please enter an email address.
Please enter a ZIP code.
Please select an asset level.
1000 characters remaining
Please enter a message.
DIFFERENTIATORS
GETTING STARTED
MATERIALS
How We Are Different
Understanding Your Financial Statement
Articles by Dan Cunningham
Investing with Low Cost Index Funds
Pay Yourself First
Why Use a Fiduciary Financial Advisor?
Vermont Financial Planning
Quarterly Booklets
Financial Planning
Investor Resources
Investment Tools
Financial Firm Comparison
The Investment Process
One Day In July in the Media
Local Financial Advisor
How to Switch Financial Advisors
Frequently Asked Questions
Book Recommendations
Types of Investors
One Day In July Careers
Prospect Booklet
Square Mailers
Fee Calculator
SERVICES
Types of Accounts We Manage
Options for Self-Employed Retirement Plans
Saving Strategies
What to do When Receiving a Pension
Investment Tax Strategy: Tax Loss Harvesting
Vermont Investment Management
How to Invest an Inheritance
Investment Tax Strategy: Tax Lot Optimization
Vermont Retirement Planning
How to Make the Best 401k Selections
Investing for Retirement: 401k and More
Vermont Wealth Management
How to Rollover a 401k to an IRA
Investing in Bennington, VT
Vermont Financial Advisors
Investing in Albany, NY
Investing in Saratoga Springs, NY
New Hampshire Financial Advisors
INVESTING THOUGHTS
Should I Try to Time the Stock Market?
Mutual Funds vs. ETFs
Inflation
The Cycle of Investor Emotion
Countering Arguments Against Index Funds
Annuities - Why We Don't Sell Them
Taxes on Investments
How Financial Firms Bill
Low Investment Fees
Retirement Financial Planning
Investing in a Bear Market
Investing in Gold
Is Your Investment Advisor Worth One Percent?
Active vs. Passive Investment Management
Investment Risk vs. Investment Return
Who Supports Index Funds?
Investing Concepts
Does Stock Picking Work?
The Growth and Importance of Female Investors
Behavioral Economics
The Forward P/E Ratio

Vergennes, VT Financial Advisors

206 Main Street, Suite 20

Vergennes, VT 05491

(802) 777-9768

Wayne, PA Financial Advisors

851 Duportail Rd, 2nd Floor

Chesterbrook, PA 19087

(610) 673-0074

Burlington, VT Financial Advisors

77 College Street, Suite 3A

Burlington, VT 05401

(802) 503-8280

Middlebury, VT Financial Advisors

79 Court Street, Suite 1

Middlebury, VT 05753

(802) 829-6954

Hanover, NH Financial Advisors

26 South Main Street, Suite 4

Hanover, NH 03755

(802) 341-0188

Rutland, VT Financial Advisors

734 E US Route 4, Suite 7

Rutland, VT 05701

(802) 829-6954


v 2.4.55 | © One Day In July LLC. All Rights Reserved.