State imposed penalty?

L1: State imposed penalty?Generally speaking, if a state imposes an early withdrawal penalty, does the state follow federal guidelines of the SEPP IRC Sec. 72(t) to establish penalty-free withdrawals from an IRA?
This site has been invaluable.
Thank you.2006-08-04 19:11, By: CAT2, IP: [172.16.1.70]

L2: State imposed penalty?Yes. I have never heard of a state (such as CA) that does have their own early withdrawal penalty not recognizing the same exceptions to exempt that penalty used under federal rules.2006-08-04 22:18, By: Alan S., IP: [24.116.165.157]

L2: State imposed penalty?Hello CAT2:
The States (and unfortunately there are 50 of them) are all over the ballpark from: tax exemption; either in whole or part; credits of various kinds; exemptions that kick in a certain age points, to straight following form to the federal statutes. I just looked at Wisconsin very briefly; they impose a penalty but only when the federal penalty or surtax is imposed. I have never seen a state that imposes an early withdrawal penalty when the fed”s do not; however, the moment I say that some one will discover a state that does.
All that said, everyone should carefully look at their state income tax instruction guides as the breaks/credits/exemptions on IRA distributions are sometimes fairly obscure.
TheBadger
wjstecker@wispertel.net

2006-08-04 22:18, By: TheBadger, IP: [66.109.211.254]

L2: State imposed penalty?Hello,
I can only speak from my experience as a resident of Pennsylvania; however, in my case, I was able to withdraw “penalty-free” (from my 72t IRA) all money that I had already paid state tax on when contributing to my 401k (which was directly rolled over into my 72t IRA).Any money withdrawnafter reaching the limits of your already taxed contributions are subject to the PA early withdrawl penalty prior to 59.5. Also, it goes without saying that good supporting documentation is essential in case you are audited by the state.
gus825702006-08-05 20:38, By: gus, IP: [70.110.145.26]

L2: State imposed penalty?Hello,
A correction to my previous post where I said “Any money withdrawnafter reaching the limits of your already taxed contributions are subject to the PA early withdrawl penalty prior to 59.5.”
I really meant to say “Any money withdrawnafter reaching the limits of your already taxed contributions are subject to taxation at the standardPA tax rate.”
gus825702006-08-05 20:46, By: gus, IP: [70.110.145.26]

L2: State imposed penalty?A final hello,
I apologize for the confusion but here is my final correction statement:
I really meant to say “Any money withdrawnafter reaching the limits of your already taxed contributions are subject to taxation at the standardPA tax rate until you reach the age of 59.5. After that, all withdrawls are free of the PA state tax, regardless of whether or not you previously had paid tax on the contributions.”
gus825702006-08-05 20:51, By: gus, IP: [70.110.145.26]

L2: State imposed penalty?Gus,
I think you are addressing a different issue. Your posts refer to a special subtraction from income for PA IRA distributions that exempts them from taxation. Where there is no tax, there would of course be no early withdrawal penalty.
The original issue was whether a state that does tax certain distributions would not accept any of the federal exemptions from penalty such as 72t. That would result in the state levying a penalty that had been waived by the federal rules. That is a different issue than whether a state taxes distributions in the first place or not.
2006-08-05 23:06, By: Alan S., IP: [24.116.165.157]

L2: State imposed penalty?gus:
I too am from PA, but I thought once you roll the 401K into an IRA and start SEPP withdrawals, if you are under 59 1/2 you will also pay PA State Income Tax until you reach 59 1/2. I understand if you retire after 55 you can make periodic withdrawals from the 401K, if permissable by the Plan, without paying the PA income tax on money that already has been taxed (your contributions).
Once rolled into an IRA it takes on the characteristic of an IRA with withdrawals being taxed by the state (PA)until 59 1/2 – is this not correct?
meb242006-08-06 13:45, By: meb24, IP: [71.230.92.4]

L3: State imposed penalty?meb24,
Any money that has been previously taxed in PA is not taxable again. However, the real catch is you have to prove to the state that whatever amount you intend to withdrawl was, in fact previously taxed. Fortunately, for me, I had all of my tax records dating back to 1986, so I have a good paper trail in case they ever decide to audit me. Also, here is the supporting evidence from the state you are looking for:

Q & A from: https://revenue-pa.custhelp.com

Question

How do I determine if my IRA withdrawals are subject to PA income tax?

Answer

Distributions from an IRA are not taxable if the payments are:1. Received, including lump sum distributions, on or after retirement, and after reaching the age of 59 1/2.2. Paid to the estate, or designated beneficiary, of the participant by reason of the participant’s death.Distributions you receive before age 59 1/2, even if you are retired, are taxable even if you receive substantially equal payments, and for federal purposes, you do not pay a penalty for an early withdrawal. Distributions from an IRA, including a federal Roth IRA, are taxable to the extent the distribution exceeds your previously taxed contributions. Further, under the cost recovery method, the taxpayer is required to remove his contributions first and then the untaxed portions.PA law does not have any exceptions similar to the federal exceptions for withdrawal before age 59 1/2.
Please note my bolded text:
Also, here is what I send to the state every year with updated information so they can track easily track how much I started with and how much I have left to wuithdraw state tax free.

[Date here]

To: PA Dept. of Revenue
From: [Names Here]

RE: Amended 2004 PA Tax Return – Explanation

Dear PA Dept of Revenue Representative,

Our 2004 PA Tax Return has been amended to meet the PA requirements for IRA distributions using the cost-recovery method. Please refer to the attached 401k Contribution, Rollover and IRA Distribution Record for [Name Here]۝ for specific details.

Best regards,

_________________________________ Date: _____________________

_________________________________ Date: _____________________

401k Contribution, Rollover, and IRA Distribution Record for [Name Here]

Year

401(k) Elec. Def. Max

My Annual 401(k) Contributions 1

2004

13,000

Rollover IRA (SEPP) monthly distributions started mm/yy 2

2003

12,000

Direct 401(k) transfer to rollover IRA

2002

11,000

00,000.00 (retired mm/yy)

2001

10,500

00,000.00

2000

10,500

00,000.00

1999

10,000

00,000.00

1998

10,000

00,000.00

1997

9,500

00,000.00

1996

9,500

00,000.00

1995

9,240

00,000.00

1994

9,240

00,000.00

1993

8,994

00,000.00

1992

8,728

00,000.00

1991

8,475

00,000.00

1990

7,979

00,000.00

1989

7,627

00,000.00

1988

7,313

00,000.00

1987

7,000

00,000.00

Total 401(k)Contributions: 000,000.00 3
1 PA state taxes were withheld by employer and reported as such on each year”s individual W2 for [Name Here]
2 2004 PA Tax Return has been amended to utilize the cost-recovery method on a first year distribution of $00,000
3 Total dollars meeting PA requirements for IRA distribution using the cost-recovery method

Q & A from: https://revenue-pa.custhelp.com

Question

How do I determine if my IRA withdrawals are subject to PA income tax?

Answer

Distributions from an IRA are not taxable if the payments are:1. Received, including lump sum distributions, on or after retirement, and after reaching the age of 59 1/2.2. Paid to the estate, or designated beneficiary, of the participant by reason of the participant’s death.Distributions you receive before age 59 1/2, even if you are retired, are taxable even if you receive substantially equal payments, and for federal purposes, you do not pay a penalty for an early withdrawal. Distributions from an IRA, including a federal Roth IRA, are taxable to the extent the distribution exceeds your previously taxed contributions. Further, under the cost recovery method, the taxpayer is required to remove his contributions first and then the untaxed portions.PA law does not have any exceptions similar to the federal exceptions for withdrawal before age 59 1/2.

Good luck,
gus2006-08-07 10:40, By: gus, IP: [70.110.140.107]

L2: State imposed penalty?meb24,
My previous lenghtly post was removed (sorry GFW) so here is a direct link to the state that will answer your specific question.
https://revenue-pa.custhelp.com/cgi-bin/revenue_pa.cfg/php/enduser/std_adp.php?p_faqid=365&p_created=1038892542&p_sid=dboQCuei&p_lva=&p_sp=cF9zcmNoPTEmcF9zb3J0X2J5PWRmbHQmcF9ncmlkc29ydD0mcF9yb3dfY250PTEzOTgmcF9wcm9kcz0mcF9jYXRzPTAmcF9wdj0mcF9jdj0mcF9zZWFyY2hfdHlwZT1hbnN3ZXJzLnNlYXJjaF9ubCZwX3BhZ2U9MSZwX3NlYXJjaF90ZXh0PUhvdyBkbyBJIGRldGVybWluZSBpZiBteSBJUkEgd2l0aGRyYXdhbHMgYXJlIHN1YmplY3QgdG8gUEEgaW5jb21lIHRheA**&p_li=&p_topview=1
gus2006-08-07 11:13, By: gus, IP: [70.110.140.107]

L2: State imposed penalty?Alan S.
I guess I was a little confused; however, thank you for the explanation. If one follows the previous link provided, they will get their answers.
gus2006-08-08 05:01, By: gus, IP: [70.110.187.242]