Question on taxes and 403b vs Roth IRA

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Question on taxes and 403b vs Roth IRA

Postby jvbishop » Wed Jun 17, 2009 11:33 am

I have a question concerning the tax benefits of a 403b(a 401k for non-profits) and a Roth IRA. I have been putting as much as I can into the 403b but have recently come to the conclusion that I'm setting myself up to lose more on the taxes later. I think this position is unique to my particular state (Pennsylvania) and particularly to those who live here now but may not later in life. Pennsylvania, apparently realizing that most people don't dream of retiring to their state have decided to get theirs now as far as taxes go. Therefore the state and the municipalities of the state do not allow you to deduct contributions to retirement accounts from your state and city income taxes. They do not tax you on the withdrawals though. This is pretty much the opposite of how every other state does it which brings me to what I believe my problem is.

I'm a tad nomadic. The likelihood that I will retire in Pennsylvania is slim. Therefore I will probably end up paying state and local income taxes on my 403b distributions when I take them despite having already paid taxes on them once. I have been thinking therefore that I should redirect the amount of money in excess of that needed to get my employer match towards a Roth IRA instead. I'll still be paying the PA and local tax on the contributions as well as paying federal taxes, but when I retire I will be able to withdraw the money without paying taxes on it no matter where I live.

Does this plan make sense or does anyone see something I've overlooked.

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Postby frugalcoconut » Wed Jun 17, 2009 8:13 pm

That was a great question. I felt like doing some research on the web and here's what I came up with ... it's not a definitive answer so I still recommend that you consult a tax advisor.
401K question - My 401k contributions are taxed by the state i live in now. If I retire in a state that taxes withdrawals, will i get taxed again?
Yes. If you live in Pennsylvania, which does not recognize the tax deferred status of 401k contributions(they consider them part of your income), and you retire in North Carolina which does treat contributions as tax deferred: North Carolina will tax you on your withdrawals. ... 082508.asp
There’s no requirement to retain your retirement plan statements or the records of contributions you have made to individual retirement accounts, but they are handy records of what you have saved and can expect to receive when you retire. Keep your quarterly summaries until you receive annual statements, then toss the quarterly statements if the annual summaries are correct. Remember, when you make a nondeductible contribution to an IRA account, your records document that you paid taxes at the time of the contribution, so you don’t have to pay them later when you withdraw the money. You must report your nondeductible contribution to a traditional IRA on Form 8606 filed with your tax return. Keep a copy of each Form 8606 to keep track of your total basis. ... 0_book.pdf
PA law does not permit deductions or exemptions for
contributions to retirement plans, investments in annuities,
mutual funds, money market funds, and other personal
contributions, even when deducted or exempt for federal
purposes. Therefore, Pennsylvania will not tax your distributions
or the payments you receive until you have recovered
an amount equal to your previously taxed contributions.
Maintain your records of your contributions. If you
receive an early taxable distribution from a retirement plan,
and you do not have records of your contributions, consult
your plan administrator.

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