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Old 08-23-2010, 04:38 PM
 
Location: Just moved to Lehigh Valley, PA from So. Calif.
548 posts, read 846,140 times
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Hey all, we are presently living in California, but we will be moving to PA (possibly before year-end). I am not 59-1/2 yet, so I won't be touching the money in my 401K at this time. The question I have is does PA tax the money that I will be withdrawing from my 401K in the future? I know that California does. California also taxes pensions, but from what I understand, PA does not.

Anyway, I was trying to find some info online, but I didn't see anything specifically about 401K's. Thanks for any info you can provide.

By the way, I mentioned a few weeks ago that we were loving the cooler-than-normal weather we were having, but I was dreading the hot weather we would eventually get. Well, it's here!!! It's 102 degrees right now and is supposed to be between 107-112 for the rest of the week - YUCK! I see that you're finally getting some relief from the hot weather, and some much-needed rain. Don't get me started with rain - we don't see any rain from around May until November, so our grass looks like straw even though we water every 2-3 days. Enjoy the rain that you are getting. I know it's been pretty dry in PA this summer too.
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Old 08-23-2010, 06:28 PM
 
Location: Pittsburgh area
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401k is not recognized as tax deferred at time of deposit in PA. So let's say you were working here and contributing to 401k. You would be paying tax on those contributions. Then, later on, you take it all out. If it has earned any money at all compared to what you put in over the years, then you pay tax at that point on the difference between your contributions and the present value.

Now here's the question you really need to have answered: since your 401k contributions did not happen in PA and thus never were subject to PA tax, are they going to tax you on the entire thing? This I do not know. But you will at least be taxed on any withdrawal amount over and above the amount of your contributions. Assuming they will not try to get you on the full amount, it could be years before you actually have to pay tax on the distributions.

Disclaimer: not a tax expert, but I did take a distribution of my 401k last year when our plan was terminated. I had to read up in April on how to treat this. I was underwater, contributed more than account value at time of distribution. There is no allowance for this sort of loss, though, except to offset like sort of income (i.e. you can use it to offset any additional 401k income and that's it).
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Old 08-23-2010, 11:41 PM
 
3,053 posts, read 2,440,214 times
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The PA department of revenue documentation and instructions are a maze of complex beauracracy.

However, I think that greg42 is NOT correct, except for pre-retirement withdrawls from the retirement account. For post-retirement withdrawls, I don't believe they're taxed AT ALL.

I believe that once you are eligible to retire and retire (whatever that actually means precisely in the law), PA does NOT tax ANY of your 401k's payments to you. They ONLY tax the amount in excess of what you had contributed IF you start withdrawing BEFORE you were eligible to retire and retired. In the case of IRAs, no IRA distribution to you is taxable after you reach age 59 1/2. The law for 401ks is similar in that the distributions are NOT taxable once you are eligible to retire and retired (again, whatever that means precisely in the law).

The documentation I read was on the instructions to the PA-40 form (relevant info on page 12)
http://www.portal.state.pa.us/portal...9_pa-40_in_pdf

Documentation regarding IRAs I found here
http://www.portal.state.pa.us/portal...61/rev-636_pdf

Documentation index for Personal Income Tax
Personal Income Tax

Bottom line is it sounds like PA really rewards you for waiting until you actually retire before withdrawing from any retirement account you have.

Somebody with experience retiring in PA, please back me up if I'm correct. I'm very curious if I'm right as well, for my own personal reasons.
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Old 08-24-2010, 10:29 AM
 
Location: Pittsburgh area
9,886 posts, read 9,895,663 times
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That appears to be true, my apologies for neglecting the retirement factor and not looking it up. The funny thing is the way it defines this in the instructions, beginning near the top left of Page 13:

Quote:
Distributions from Employer-Sponsored Qualified Retirement orDeferred Compensation Programs
All amounts you receive from your employer's PA qualifying retirement or old age benefit plan are taxable in the year you receive the payments, except:
So it starts off by telling you they're all taxable. Weird. Is this because most people (even me, who never had plans to do so) end up taking it out before they reach retirement? Anyway, exceptions start like this:

Quote:
1. Payments you receive after you qualify for retirement and retire.
This is also weird. Normally the age (usually 59 1/2) is specified. I can't remember if you have to state you are retired or not on your tax return. What happens if you retire and then go back to work later? That I don't know. I don't see how they could go back and say "Hey, you didn't really retire" when you did. Hm. But, regardless of that mess, it does say they don't tax it after you retire. Which is fantastic. It means all growth was completely tax-free, just like a Roth IRA. Honestly I'm shocked how that works.

This is the exception I used in my case:

Quote:
3. Distributions from an employer-sponsored deferred compensation plan that represent your previous contributions.
It's nice of them not to tax me a second time on my contributions. (Unlike federal income tax, for PA income tax the contributions to 401k are not pre-tax.)

Exception #2 is for rollovers. It's just weird to see it defined as "Hey we tax it" when it seems like for most people it should end up not being taxed.

For OP, this means your 401k should not be taxed as long as you can claim to be "retired". I guess the next step for both of you other posters is to muck around with how PA defines retired. Since they don't use the typical 59 1/2 age thing, I really don't know what the answer is.
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Old 08-24-2010, 11:05 AM
 
Location: Just moved to Lehigh Valley, PA from So. Calif.
548 posts, read 846,140 times
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Thank you Greg and Davros. It does seem kind of complex. It doesn't really explain what "retired" means. It would be much easier to understand if it just stated "at age 59-1/2".

If anyone else has any insight, please let me know.
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Old 08-24-2010, 05:24 PM
 
Location: Hooterville PA
712 posts, read 1,065,140 times
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Here is my two cents.

I would compare someone moving from California to Pennsylvania - to get out of paying taxes to a person that plants a garden and grows vegetables.

Lets say you have a big yard and you decide to dig a garden and plant vegetables.

So you go out and you buy a rake and a shovel and a hoe and a garden hose and a rototiller and a wheel barrow and a cultivator and a couple of bags of lime and some fertilizer and some seed and some plants and some Miracle Grow and a feeder and you dig the garden, till the soil, apply the fertilizer and do all the work necessary to plant a garden.

Then once the work is done, your neighbor comes over and picks your vegetables and you don't get anything. Wouldn't that make you mad?

Well - if you lived in one state and paid no taxes on your income and then when it came time to retire, you moved to avoid paying taxes and lived like a king in a area where other peoples income were taxed and they paid to support the local and state government all their lives and then when it came time for them to retire - someone else comes along and enjoys the same benefits - yet they never contributed to the fund.

At the same time, if they moved to California, maybe they would be taxed twice for what they made all the years that they worked.
Would that make any more sense?
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Old 08-24-2010, 07:13 PM
 
Location: Just moved to Lehigh Valley, PA from So. Calif.
548 posts, read 846,140 times
Reputation: 365
Bob, first of all, we are not moving out of CA to get out of paying taxes. My mother's health and my mother-in-law's health are not at all good, and they need us to be there to help them. Never in our wildest dreams did we think of leaving CA, before having to do so for them. We are not hesitating in the least to move for them. After all they have done for us over the years, it's the least we can do.

The only reason I asked the 401K question is for informational purposes so that we know what to expect in the future. And, believe me, with the amount of money in my 401K, there is no chance of me living like a King (or Queen for that matter).
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Old 08-24-2010, 08:10 PM
 
Location: Hooterville PA
712 posts, read 1,065,140 times
Reputation: 267
Then why not move them to California?
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Old 08-24-2010, 08:15 PM
 
Location: Just moved to Lehigh Valley, PA from So. Calif.
548 posts, read 846,140 times
Reputation: 365
Bob, I wish I could. They won't move. One is in PA and the other is in NJ. We tried to persuade them to do so, but they like where they are, so we will do this for them.

Anyway, thanks all for your responses. They are much appreciated.
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Old 08-25-2010, 12:31 AM
 
3,053 posts, read 2,440,214 times
Reputation: 2707
Rosanne,

I wouldn't worry too much about what one poster on city-data thinks about the morality of your moving to PA, or what he thinks you're doing to "his" garden. You'd still be paying property taxes, sales taxes. You'd be buying products from Pennsylvanians, which helps Pennsylvanians keep their jobs.

I'll bet most Pennsylvanians are happy people want to move IN. The opposite is people moving OUT, which is what's happening in Detroit for example.
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