California mostly follows the IRS's rules when it comes to IRA deduction limits. That means that you may be able to claim a deduction on this year's income tax return if you contributed money to your IRA. However, you'll need to be prepared to pay taxes if this is the year you begin taking IRA distributions.
What Are the IRA Rules in California?
First, there are limits to how much you can contribute to a traditional IRA in a year. You cannot contribute more than your taxable compensation for the year. Yes, that includes both your salary and benefits. However, it may be possible to contribute your entire taxable compensation for the year if you made less than the contribution threshold for your filing category.
If you're under age 50, the maximum contribution limit is $6,000. If you're 50 or older, the limit is $7,000. That means that a person under the age of 50 who happens to make $6,000 in taxable income could hypothetically contribute their full salary for the year. Your IRA contributions can be made up to your filing date.
Are IRA Contributions Tax Deductible in California?
The maximum California IRA deduction limit is the same thing as the contribution limit. That means either $6,000 or $7,000 based on your age. However, not everyone qualifies for the full deduction. Here's who gets the full California IRA deduction:
- Filing as single making any amount.
- Filing as head of household making any amount.
- Filing as a qualifying widow(er) making any amount.
- Married filing jointly with a spouse who is not covered by a plan at work making any amount.
- Married filing jointly with a spouse who is covered by a plan at work with an adjusted gross income (AGI) or $196,000 or less.
You're not out of luck if you can't get the full California IRA deduction. Many people who don't qualify for a full deduction will at least qualify for a partial deduction. Here's a look:
- Married filing jointly with a spouse who is covered by a plan at work making between $196,000 and $206,000.
- Married filing separately with a spouse who is covered by a plan at work making less than $10,000.
You won't qualify for a deduction if you are married filing jointly with a spouse who is covered by a plan at work while making at least $206,000. The same goes if your status is married filing separately with a spouse who is covered by a plan at work while making $10,000 or more. Of course, California is also interested in your IRA tax distributions.
Does California Tax IRA Distributions?
Yes, retirement account income happens to be considered taxable income in California. The state considers any withdrawal from something like your IRA or 401(k) to be a withdrawal from your retirement account. The same rule also applies to things like public and private pensions.
When taxing IRA distributions, California actually combines that income with any other income you receive for the year to determine your tax bracket. This means that IRA distributions are taxed at the same rate as ordinary income in California. As a result, you're looking at a tax rate that falls between 1 percent and 13.3 percent depending on your income bracket up until you hit $1 million.
The exception is if you are taking withdrawals from a Roth IRA that is considered a tax-free and penalty-free account. If you take IRA distributions before the age of 59, California will apply a penalty of 10 percent to the distribution.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.