Can I be taxed twice on my retirement plan?October 19, 2012: 6:30 AM ET
I paid state taxes on retirement contributions. Now I'm being taxed on withdrawals. Is that legal? — John Wallach, Elkton, Md.
Unfair, yes, but still legal. Pennsylvania, your former home, is one of only two states—New Jersey is the other—that tax retirement plan contributions that aren't taxed at the federal level. Instead, it's distributions that are tax-free in Pennsylvania. Maryland, like most states, taxes distributions, not contributions. Easing the pain: If you're 65 or older, up to $26,300 of 401(k) income is excluded from taxes, though Social Security income reduces that break, says Westminster, Md., CPA Lee Sturgill.
Checking out a state's tax laws before retiring pays off. "It's not just about income taxes," says Baltimore planner Kirk Kinder. "Different estate tax laws play a factor too." You can start researching at retirementliving.com.
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