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PA STATE INCOME TAX on 401K withdrawal Pennsylvania

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  • PA STATE INCOME TAX on 401K withdrawal Pennsylvania


    Early withdrawal from 401k (before 59.5): I am retired over 55 but under 59.5 & taking Periodic withdrawals from 401k. My understanding is PA doesn't tax withdrawals until your withdrawal is greater than your overall contributions to the plan (Cost Recovery Method).

    I called the custodian to get the total contributions over the life of the plan so I can figure my tax liability for PIT, but they said they only have it listed as contribution w/earnings & agent doesn't think any of the systematic withdrawals are tax exempt for PA Income Tax purposes. My interpretation from the PA DEPT OF REV. site is withdrawals are tax-exempt up to the total of my contributions if taken before 59.5 & totally tax-exempt after 59.5. Agent said there is no way to separate earning from contributions so doesn't see how this can be so.

    Am I correct in my assumption? If so, how can I go about getting total contributions & prior withdrawals without searching 20 something yrs. of statements & tax returns. I can get up to 18 months online, but not back 20 yrs. Shouldn't the custodian be able to retrieve that info. or is it my responsibility to keep such records.

    Main issue: Withdrawals tax-free up to amount of contribution (PIT doesn't care whether part of withdrawal is earning or not) It's just the total contributions (over 20+ yrs) -minus the total withdrawal - correct??

    If I haven't recovered all my contribution by 59.5 all withdrawals after that point are tax-free for PIT purposes.


    Thanks, meb24

  • #2
    You are not permitted to withdraw any sum of money from your 401k account, you can do so ONLY if you meet 1 of these 401k "hardship withdrawal" rules:

    i) the withdrawal is due to an immediate and important financial need
    ii) the withdrawal must be necessary to satisfy that need
    iii) You have no other way to fulfill that need or no other sources of money
    iv) the withdrawal should not exceed the total amount needed by you
    v) You cannot contribute to your 401k plan for up to 6 months after your withdrawal date
    vi) You must have first received all non-taxable distributions or loans available under your 401k

    I think you might be misunderstanding a 401k with a Roth IRA.

    Roth IRA investors can withdraw up to the total value of their contributions at any time without getting hit by the 10% early withdrawal penalty, not 401k investors.

    Hope that helps?


    • #3
      I checked with 401k administer last year before making any withdrawals & he said I can take systematic periodic withdrawals from 401k since I was over 55 when I separated from employment.

      There is no 10% penalty for Fed. Tax (just regular income tax) & I check with Pa. Dept. of Rev. website & you don't have to pay tax until after you recover what you put in since that was already taxed. I think it's know as the COST RECOVERY METHOD or something of that nature.

      I'm not confusing my 401K with a ROTH IRA - I didn't want to move the money from the 401k to a TIRA because then I'd be locking into a 72T for 5 years. This way I can do systematic withdrawals until 59.5 & then rollover to TIRA & make withdrawals as necessary.

      Hopefully, I'm right on this because I've been making monthly withdrawal for 15 months now. I am right at the point where I've gone over the amount I put into the plan & will have to pay PA STATE TAX on any future withdrawals.