Incentive for choosing traditional over Roth IRA in Pennsylvania?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
brucey
Posts: 4
Joined: Sat Jun 08, 2019 7:26 pm

Incentive for choosing traditional over Roth IRA in Pennsylvania?

Post by brucey » Fri Jun 14, 2019 2:31 pm

While planning to open a traditional or Roth IRA, I learned that traditional IRAs are not tax deductible in Pennsylvania where I work. I would otherwise quality for the deduction.

(source)
https://www.revenue.pa.gov/FormsandPubl ... ev-636.pdf

Am I correct that there's no incentive to choose traditional over Roth while I work in PA? I understand PA doesn't tax distributions, but I will no be retiring in PA. It seems that if I retire in a place with income tax, I could end up being taxed twice on a traditional IRA.

Silk McCue
Posts: 2403
Joined: Thu Feb 25, 2016 7:11 pm

Re: Incentive for choosing traditional over Roth IRA in Pennsylvania?

Post by Silk McCue » Fri Jun 14, 2019 3:01 pm

What is your marginal Fed Rate compared to PA rate of 3 .07%?

Traditional still reduces your federal tax so it is beneficial as it offsets the state income tax. Roth gives you no tax benefit in the present.

Cheers

megabad
Posts: 1768
Joined: Fri Jun 01, 2018 4:00 pm

Re: Incentive for choosing traditional over Roth IRA in Pennsylvania?

Post by megabad » Fri Jun 14, 2019 3:13 pm

brucey wrote:
Fri Jun 14, 2019 2:31 pm
Am I correct that there's no incentive to choose traditional over Roth while I work in PA? I understand PA doesn't tax distributions, but I will no be retiring in PA. It seems that if I retire in a place with income tax, I could end up being taxed twice on a traditional IRA.
I wouldn't say that there is no incentive, but yes, very limited incentive at the state level The Roth conversion strategy can still work depending on your specific retirement strategy. I agree with above post that your current and future federal tax situation is generally far more important and should probably drive the Roth vs Traditional decision.

User avatar
grabiner
Advisory Board
Posts: 24384
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Incentive for choosing traditional over Roth IRA in Pennsylvania?

Post by grabiner » Fri Jun 14, 2019 9:20 pm

Silk McCue wrote:
Fri Jun 14, 2019 3:01 pm
What is your marginal Fed Rate compared to PA rate of 3 .07%?

Traditional still reduces your federal tax so it is beneficial as it offsets the state income tax. Roth gives you no tax benefit in the present.
And this is offset by the tax rate in retirement. If you will retire at the same federal marginal tax rate, the Roth is better if you retire in a state with an income tax, and just as good if you retire in a state with no income tax. If you will retire at a lower federal marginal tax rate, the traditional IRA is probably better.

The situation in NJ is worse; NJ doesn't allow a deduction for traditional IRA contributions, but still taxes gains. Thus, if you live in NJ and might retire there, you have a significant incentive to use a Roth IRA, almost as strong as if you live in NJ and expect to retire in a state with an income tax.
Wiki David Grabiner

lakpr
Posts: 1607
Joined: Fri Mar 18, 2011 9:59 am

Re: Incentive for choosing traditional over Roth IRA in Pennsylvania?

Post by lakpr » Sat Jun 15, 2019 6:08 am

For IRAs, both in NJ and in PA (I live in NJ), I strongly advise contributing to Roth, unless you gain additional benefit apart from the tax deduction itself (such as increasing EITC, qualifying for Retirement Savers Credit, getting more subsidies for ACA etc.).

If contributing to a traditional IRA gets you the tax deduction, that is actually implying you are in a very low tax bracket, 10% to 12%. To me, Traditional contributions are a way to escape higher taxes in the present and pay lower taxes in retirement. It does not make much sense to escape taxes now when you are already in low tax brackets.

For what it is worth, also, the tax rates are poised to rise back to 2017 levels starting 2026. The same income that you are currently getting taxed at now in 12% bracket, will start getting taxed at 15% then. It is a cwry strong incentive to chooae Roth IRA at least for the next 7 years, perhaps revert to traditional IRA after 2025

bjs2025
Posts: 17
Joined: Tue May 28, 2019 8:17 am

Re: Incentive for choosing traditional over Roth IRA in Pennsylvania?

Post by bjs2025 » Sat Jun 15, 2019 6:48 am

How would this apply to 401K’s in PA? Traditional vs Roth. The same?

Silk McCue
Posts: 2403
Joined: Thu Feb 25, 2016 7:11 pm

Re: Incentive for choosing traditional over Roth IRA in Pennsylvania?

Post by Silk McCue » Sat Jun 15, 2019 6:59 am

bjs2025 wrote:
Sat Jun 15, 2019 6:48 am
How would this apply to 401K’s in PA? Traditional vs Roth. The same?
From a web search
Pennsylvania's tax treatment of 401(k) plans is essentially the opposite from the federal system's. In Pennsylvania, your 401(k) contributions are fully taxable in the year you make them. Investment profits are still tax-free. Then, when you reach the eligible age of 59 1/2, your distributions are completely untaxed.
Cheers

User avatar
grabiner
Advisory Board
Posts: 24384
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Incentive for choosing traditional over Roth IRA in Pennsylvania?

Post by grabiner » Sat Jun 15, 2019 4:28 pm

Silk McCue wrote:
Sat Jun 15, 2019 6:59 am
bjs2025 wrote:
Sat Jun 15, 2019 6:48 am
How would this apply to 401K’s in PA? Traditional vs Roth. The same?
From a web search
Pennsylvania's tax treatment of 401(k) plans is essentially the opposite from the federal system's. In Pennsylvania, your 401(k) contributions are fully taxable in the year you make them. Investment profits are still tax-free. Then, when you reach the eligible age of 59 1/2, your distributions are completely untaxed.
Cheers
So this is the same situation as with IRAs. If you contribute to a traditional 401(k) in PA, you don't get a state tax deduction; then, if you retire outside PA, you may pay tax on the whole amount. (If you are in a high federal bracket and retire in a lower bracket, the traditional 401(k) may still be better.)
Wiki David Grabiner

Post Reply