Most Pennsylvania residents under retirement age will owe taxes to the Pennsylvania Department of Revenue (DOR) with few exceptions if they make large withdrawals from their Individual Retirement Account (IRA) plan or cash it out completely. Plan holders in the state who make small withdrawals can usually avoid paying tax. They must report taxable distributions to the DOR or may face civil penalties.
IRA plan holders will not pay any income tax on sums removed from their retirement plan after they reach the age of 59 1/2. The state of Pennsylvania only requires residents to pay taxes on any tax-deferred gains from their retirement plan. For example, a resident who has $10,000 in his account from contributions and $5,000 from gains can withdraw up to $10,000 from his IRA without paying income tax at the state level.
Even if Pennsylvania residents remove funds from their IRA for a purpose approved by the IRS, such as medical bills, education expenses and other hardships, they will still owe state income tax on all withdrawals, according to the Pennsylvania Department of Revenue. Residents who retire before 59 1/2 years of age will still pay income tax on IRA gains. If an IRA plan holder dies before the age of 59 and a half, his estate or beneficiaries can withdraw funds from his IRA without having to pay Pennsylvania income tax.
The state of Pennsylvania sets a flat tax rate of 3.07 percent on all early withdrawals from an IRA plan as of 2011, according to the Tax Foundation. Deductions for federal tax on IRA contributions help soften the blow of this tax rate. While most forms of income in the state are subject to a local sales tax averaging between 1 and 1.5 percent, plan holders will not pay local income taxes on removed funds.
Pennsylvania taxpayers must report all income removed from their IRA in excess of their contributions on their state tax return by the annual filing deadline, usually April 15 for the previous tax year. If their employer does not withhold state and federal income tax from their distributions, taxpayers may want to pay estimated taxes once they receive their IRA distributions when they expect to have a large tax liability by the filing deadline. The Pennsylvania DOR will assess underpayment penalties on large tax balances not paid in advance of the filing deadline. IRA plan holders can make estimated tax contributions by filing Form PA-40 ESR-I.
- Pennsylvania Department of Revenue: How Do I Determine if My IRA Withdrawals Are Subject to PA Income Tax?; December 2002
- Tax Foundation: The Facts About Pennsylvania's Tax Climate; 2011
- Pennsylvania Department of Revenue. "Personal Income Tax." Accessed Aug. 13, 2020.
- Pennsylvania Department of Revenue. "Deductions Allowed For Pennsylvania Tax Purposes." Accessed Aug. 13, 2020.
- Pennsylvania Department of Revenue. "PA Schedule UE—Unreimbursed Business Expenses." Accessed Aug. 13, 2020.
- PA529. "Frequently Asked Questions: What Are the Income Tax Benefits of Investing in a PA 529 Account?" Accessed Aug. 13, 2020.
- Pennsylvania Department of Revenue. "Tax Forgiveness." Accessed Aug. 13, 2020.
- Pennsylvania Department of Revenue. "Brief Overview and Filing Requirements." Accessed Aug. 13, 2020.
- Pennsylvania Department of Revenue. "Personal Income Tax Filing Options." Accessed Aug. 13, 2020.
- Pennsylvania Department of Revenue. "COVID-19 Information." Accessed Aug. 13, 2020.
Chris Hamilton has been a writer since 2005, specializing in business and legal topics. He contributes to various websites and holds a Bachelor of Science in biology from Virginia Tech.