They say that the future belongs to those who prepare for it today. In planning your financial future, working toward financial independence through saving or investing could be appropriate for many. Naturally, one might also need to open a savings account like an IRA or its alternative version — Roth IRA.
Nowadays, many people opt for a Roth IRA due to its tempting tax policies. Typically, these accounts are sought after throughout the country, but what happens in particular states? Does Pennsylvania tax Roth IRA, and what benefits do such accounts offer in PA?
What Is a Roth IRA?
In general, IRAs are savings accounts that help people set aside money for their retirement. Anyone with an earned income can open an IRA as there are no age limits. The only catch is the 10% early withdrawal penalty. Simply put, a person who decides to withdraw their money before the age of 59 and a half will be penalized because an IRA is exclusively meant for retirement.
By opening an individual retirement account, a person also gets certain tax advantages. Most of the time, contributions to a traditional IRA are tax-deductible. In other words, putting $2,000 into an IRA will subtract the same amount from the taxable income for that year. Later on, when the account holder decides to withdraw money in retirement, they will get taxed at their ordinary-income tax rate. Check here to find out what income is not taxable in Pennsylvania.
Unlike standard IRAs, contributions to Roth IRAs are not tax-deductible. Still, this retirement savings account does offer many tax benefits. For example, they feature qualified tax-free distributions.
While a Roth IRA invests part of its holder's income without a tax break, it allows for qualified tax-free withdrawals in the future. The account holder will have to pay their investment taxes upfront, but all their future retirement withdrawals will be tax-free.
These qualified tax-free distributions are what sets a Roth IRA apart from a traditional one. Thus, with a Roth IRA, the account holder can take their distributions (including their earnings) from their account without paying federal taxes. The only precondition is that they have held a Roth IRA for at least five taxable years and that they have turned 59 and a half.
Does PA Tax Roth IRA?
A taxpayer may contribute to their traditional IRA as long as they have earned income in the tax year the contribution is being made. Starting at age 59 ½, the account holder can choose whether to receive their distributions or not. Once the account holder obtains age 72 they must begin making RMDs (required minimum distributions), any distribution form the account is taxed at the individuals ordinary tax rate. As stated previously, although you may be taking your RMD, you can still contribute to the IRA as long as you have earned income in the tax year the contribution is being made. And as for the contributions, they lower taxable income and grow tax-deferred until the account holder withdraws them in retirement.
On the other hand, the contributions to a Roth IRA are not tax-deductible for federal income tax purposes. Also, there is no age limit when it comes to making contributions to Roth IRAs. But which other rules has the state of Pennsylvania set regarding IRAs?
In PA, contributions to traditional and Roth IRAs are not taxable. As for withdrawals, the state usually does not tax them after the taxpayer has reached their retirement age. Also, the conversion from a standard to a Roth IRA is usually not tax-deductible, either.
As for reaching the retirement age and withdrawing money from a Roth IRA in PA, here is an example of how that would go. Suppose someone in Pennsylvania decides to take their $20,000 from their Roth IRA upon turning 65. Provided this person has kept their account for more than five years, the state will not tax their distributions for the state income tax purposes. This person's distributions will not be federally taxable, either.
Key Takeaways on Taxing Roth IRAs in PA
There are certain differences between traditional and Roth retirement savings accounts on a federal level. In PA, retirement income is not generally taxable. So, Pennsylvania does not typically tax withdrawals from the Roth IRA after the account holder reaches their retirement age.
These savings accounts can prove beneficial to anyone from PA looking to invest in their retirement. For that reason, you need certified financial advising in Pittsburgh PA. Our team of professionals at the Kelley Financial Group is eager to meet all potential clients interested in opening a retirement account and will swiftly answer all financial questions such as how much money one should put in their Roth IRA monthly.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earning prior to age 59 ½ or prior to the account being opened 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Traditional IRA account owners have considerations to make before performing a Roth IRA Conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take required minimum distribution (RMD) in the year you convert you must do so before converting to a Roth IRA.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax, legal, or investment related advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
This material was prepared for The Kelley Financial Group.
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