Wednesday, July 17, 2013
Withdrawing money from a traditional IRA is taxable on the federal level. Additionally, people withdrawing from IRA’s will be taxed on the state level as well unless they live in one of the seven states without state income tax. A few states do not tax withdrawals from your IRA or other retirement accounts. Other states exempt a partial amount from taxes. People should keep in mind that tax breaks can change in a state particularly after a financial crisis.
The "basis" is the price of an investment. This cost is used to calculate the taxable income. For federal tax purposes, the basis is zero for additions to a tax-deductible IRA. The entire amount of a withdrawal is taxable. Unlike the federal tax, there is a basis for state tax when there is no tax deduction. For folks planning to move it is important to remember that under federal law you are taxed in the state where you live.
See Georgette Jasen, IRA Payouts May Avoid State Income Tax, Wall Street Journal, Jul. 7, 2013.