IRA Withdrawals May Not Face State Income Tax

Withdrawing money from a traditional IRAis taxable on the federal level. Additionally, people withdrawing from IRA’s willbe taxed on the state level as well unless they live in one of the seven stateswithout state income tax. A few states do not tax withdrawals from your IRA orother retirement accounts. Other states exempt a partial amount from taxes. Peopleshould keep in mind that tax breaks can change in a state particularly after afinancial crisis.

The “basis” is the price of an investment.This cost is used to calculate the taxable income. For federal tax purposes,the basis is zero for additions to a tax-deductible IRA. The entireamount of a withdrawal is taxable. Unlike the federal tax, there is a basis forstate tax when there is no tax deduction. For folks planning to move it isimportant to remember that under federal law you are taxed in the state whereyou live. 

See Georgette Jasen, IRA Payouts May Avoid State Income Tax, Wall Street Journal, Jul. 7, 2013.