Does PA Tax Retirement Income?
Updated: Jul 19, 2020
Does Pennsylvania tax retirement income? Is social security income taxable in PA? Are pensions taxable in PA? Does Pennsylvania tax IRA and 401k distributions? This article breaks down taxes on retirement income in Pennsylvania.
Does PA tax social security?
At the state level, social security income is not taxable in Pennsylvania.
At the federal level, social security income tax varies based on income.
For single filers with “Combined Income” in 2020:
Below $25k, social security benefits are not taxed.
Between $25k and $34k, 50% of social security benefits are taxed as income.
Above $34k, 85% of social security benefits are taxed as income.
For joint filers with “Combined Income” in 2020:
Below $32k, social security benefits are not taxed.
Between $32k and $44k, 50% of social security benefits are taxed as income.
Above $44k, 85% of social security benefits are taxed as income.
“Combined Income” is equal to Adjusted Gross Income + nontaxable interest income (such as municipal bond income) + ½ of social security income.
Joe and Mary have $30,000 per year in pension income, they also took a $20,000 Traditional IRA distribution, and they have about $20,000 per year each in social security income. They are above $44,000 per year of "Combined Income". As a result, 85% of their social security income will be taxed at their ordinary income rates. Because Joe and Mary each receive $20,000 per year in social security income in this example, 85% of that amount, or $17,000 from each of their benefits, will be taxed as income.
Is pension income taxable in PA?
At the state level, pension income is not taxable in Pennsylvania.
At the federal level, pension income is generally taxable.
Mary has pension income of $30,000 per year during retirement. This $30,000 per year is not taxable for PA state income tax purposes. However, it is taxable federally.
Does PA tax IRA distributions?
At the state level, IRA distributions are generally not taxable in Pennsylvania. An exception is that, if the IRA owner has not reached age 59.5 and withdraws an amount that exceeds the contributions made into the IRA account, then a portion of the distribution will be taxable at the PA state level.
At the federal level, Traditional IRA distributions are taxable. Roth IRA distributions up to the amount you contributed are tax-free, and distributions of earnings are also tax-free as long as 5 years have passed since the first Roth IRA contribution was made.
Joe, who is age 65, took $20,000 out of his Traditional IRA account this year. This $20,000 is not taxable for PA state income tax purposes. However, it is federally taxable.
Mary, who is also age 65, took $10,000 out of her Roth IRA account this year.* She’s had the Roth for 10 years. Her $10,000 Roth IRA distribution is not taxable for PA state income tax purposes, and is also not federally taxable.
*Moving forward, Mary may want to consider using her Traditional IRA or non-IRA accounts first and not touching her Roth IRA accounts until later on in retirement to receive the most benefit from tax-free growth.
Does PA tax 401k distributions?
At the state level, 401k distributions are generally not taxable in Pennsylvania. The same exception stated above for IRA accounts applies to 401k accounts as well.
Distributions from pre-tax 401k accounts are generally taxable at the federal level. Roth 401k distributions up to the amount you contributed are tax-free, and distributions of earnings are also tax-free as long as 5 years have passed since the first Roth 401k contribution was made.
Joe took $10,000 out of his pre-tax 401k account this year. This $10,000 is not taxable for PA state income tax purposes, but it is still taxable federally.
How do I pay my taxes in retirement?
When setting up income distributions from Social Security, most pensions, IRA accounts, and 401k accounts, you can elect to have taxes withheld before receiving payments.
In Pennsylvania, you should usually elect not to have PA state income taxes withheld because retirement income is generally not taxable in PA as described above.
Federally, you aren’t necessarily required to have taxes withheld, but if you fail to withhold taxes up front then you need to make quarterly estimated tax payments. If you fail to make appropriate quarterly estimated tax payments, you may owe penalties.
A fiduciary financial advisor will often suggest clients enlist the help of a CPA to reduce the risk of retirement tax mistakes.
Would you like a 1-on-1 retirement planning consultation? Fill out the “Request Consultation” form, call us at 267-427-5667, or email kyle.rolek@rolekretirement.com