For federal purposes contributions to a traditional IRA are tax deductible while contributions to a Roth IRA are after tax. In turn, distributions from a traditional IRA are taxed as income while Roth IRA distributions that meet federal qualifications are tax free. Pennsylvania treats all IRAs the same. That is, contributions are taxed going in and tax free coming out.
Pennsylvania follows federal guidelines regarding Roth IRA contribution limits. In 2011 the earnings ceiling at which you cannot contribute to a Roth is $122,000 for a single investor with contributions phased out starting at $107,000; or $179,000 for a married couple filing jointly, with contributions phased out starting at $169,000. Contributions are limited as of 2011 to $5,000 for someone under 50 and $6,000 if the investor is 50 or older. Deposits to the account can be made as monthly payments, a single lump sum or by any other means that suits the account holder. Income in Roths both for federal and Pennsylvania tax purposes accumulates tax free.
Read More: Can I Deduct IRA Contributions & Receive a Lower AGI?
Federal law allows for tax-free distributions from Roth IRAs anytime after the owner reaches age 59 1/2 as long as the plan has been in effect for at least five years. Prior to that contributions can be withdrawn tax free at any time, but investment earnings are taxed as income plus incur a 10 percent penalty. According to Pennsylvania law, the state follows the federal guidelines and does not impose income tax on Roth IRA withdrawals that are taken once the owner meets the minimum age requirements. The five year minimum doesn't apply to Pennsylvania income tax. Money that exceeds the original Roth IRA contributions is subject to tax in the state of Pennsylvania if it is withdrawn before the account holder is 59 1/2. There are no exceptions made to this rule at the state level, so even money taken for such things as medical bills or the purchase of a home that would not be subject to the federal tax penalty are subject to Pennsylvania state tax.
When the owner of a Roth IRA dies, either his designated beneficiary or his estate will receive all of the money in the account. This includes both contributions and earnings. When a named beneficiary inherits the account it can normally be taken in a lump sum or in periodic payments spread out over the individual's lifetime. In such a case, there is no Pennsylvania state income tax due on the money that comes from the account.
For federal purposes when a traditional IRA is converted to a Roth IRA taxes are due in the year of the conversion. Pennsylvania does not tax IRA conversions in the year they take place. It does, however, tax conversions from other federally qualified plans to a Roth to the extent that the money was not previously taxed. When distributions are made from a converted Roth IRA, Pennsylvania income tax will be due on amounts over and above the participant's contributions. Under Pennsylvania tax law, the taxpayer must remove his own contributions first before removing untaxed amounts.
- Pennsylvania Department of Revenue: How do I determine if my IRA withdrawals are subject to PA income tax?
- Pennsylvania Department of Revenue: Taxability of Roth IRAs according to PA income tax rules
- IRS. "Retirement Topics - IRA Contribution Limits." Accessed Nov. 1, 2020.
- IRS. "Income Ranges for Determining IRA Eligibility Change for 2021." Accessed Nov. 1, 2020.
- IRS. "Roth Comparison Chart." Accessed Nov. 1, 2020.
- IRS. "Amount of Roth IRA Contributions That You Can Make for 2020." Accessed Nov. 1, 2020.
- IRS. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed Nov. 1, 2020.
- IRS. "Retirement Topics — Required Minimum Distributions (RMDs)." Accessed Nov. 1, 2020.