Taken money out of traditional IRA

When retirees take money out of traditional IRA, I know we have to pay income tax on the amount. But do we also have to pay the payroll tax on the amount? If the amount taken out is treated as earned income, then I would think we also will have to payroll tax. Is that right?

Thanks.
-M

M:“When retirees take money out of traditional IRA, I know we have to pay income tax on the amount. But do we also have to pay the payroll tax on the amount? If the amount taken out is treated as earned income, then I would think we also will have to payroll tax. Is that right?”

NO…no payroll tax.

and even better, if you move to a state with zero or very small income tax, you take it out and just pay Fed income tax.

Lots of folks in NY and FL retire to TX and FL and avoid all state income taxes on withdrawals.

Otherwise, the money withdrawn is subject to your state income tax if you are in a state tax state.

t.

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"M:“When retirees take money out of traditional IRA, I know we have to pay income tax on the amount. But do we also have to pay the payroll tax on the amount? If the amount taken out is treated as earned income, then I would think we also will have to payroll tax. Is that right?”

you may have already paid ‘payroll’ tax of FICA and FICA 2 on your earnings if less than the ceiling amount in the year you earned it. IF you went over that threshold, no…

t.

Money withdrawn from a traditional IRA is taxable income. It is not “earned income” from employment that is subject to FICA and Medicare payroll taxes.

No, money withdrawn from a traditional IRA is not subject to any payroll tax.

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Lots of folks in NY and FL retire to TX and FL and avoid all state income taxes on withdrawals.

That’s a big sacrifice to make to avoid paying taxes.

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>>Lots of folks in NY and FL retire to TX and FL and avoid all state income taxes on withdrawals.<<

That’s a big sacrifice to make to avoid paying taxes. - mendomann


Again, injecting some politics into the board, eh mendomann. Just can’t help yourself, can you.

What do you say IP, should we pretend this didn’t happen?

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Again, injecting some politics

You are inferring something not necessarily implied. No politics were mentioned. Florida and Texas are not monolithic.

If you have lived in a state all your life and all of your family and friends are there, it very well may be a big sacrifice to move just to avoid a few thousand in state taxes every year.

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You are inferring something not necessarily implied. No politics were mentioned. Florida and Texas are not monolithic.

If you have lived in a state all your life and all of your family and friends are there, it very well may be a big sacrifice to move just to avoid a few thousand in state taxes every year. - hawkwin


Yep, I am pretty sure that was the point he was making.

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Agree with the foregoing. And just a fine point…Traditional IRA (TIRA) withdrawals will be treated as ordinary income for Fed tax purposes and must be included as ordinary income on that year’s tax return. Whether any tax is paid on the withdrawn (or Roth converted) amount will depend on the rest of your tax return.

The one exception to this general rule is if your TIRA contained ‘basis’, which are any after-tax dollars contributed to your IRA over the years (that is, direct contributions you made but did not deduct), which would be shown on the most recent form 8606 you filed with the IRS. Most TIRAs do not have basis, but some (like mine) do.

And yes, states like AK, WA, TX, FL, NV, SD, TN, NH and WY have no income tax. And add to this list states such as IL, MS and PA which do not tax retirement plan distributions, to include TIRAs.

So the general rule that retirement plan distributions are not subject to FICA tax is true in all cases I can think of. However, distributions from certain deferred compensation (non-qualified) retirement plans may indeed be subject to employment tax when withdrawn.

BruceM

The point that might be made is that these high-tax states are well aware of the exodus of billions in retirement money to other states and periodically make a stab at finding a way to claw back what they feel they are owed. [You earned it here; it grew tax-free here; you have to pay taxes here]. I don’t expect these efforts to stop and it is only wise to think that someday they will succeed (at least temporarily or in some special circumstance). So how do you plan accordingly?

glh
Not quite retired yet, but with a decent-sized 401K at an NJ-based company. I have worked remotely (Kansas City) for 7 years, but my check comes from HQ. The 401K is in NJ, but someday I’ll roll it out; hopefully, sooner rather than later.

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The point that might be made is that these high-tax states are well aware of the exodus of billions in retirement money to other states and periodically make a stab at finding a way to claw back what they feel they are owed.

It is reasonable to conclude that those states are well aware that some retirees flee for lower/no tax states and they account for such by simply charging more in income taxes while those residents are intrastate.

Certainly New York and Hawaii (the two highest tax burdens states) have plenty of retirees as residents so perhaps this is not a very big issue?

From 2019:
https://brookdale.org/new-yorks-older-adult-population-is-bo….

There are now more residents aged 65 and older in New York State—3.2 million—than the entire population of 21 states. Today, nearly one in six New Yorkers is 65 or above (16%), a larger share of the state’s population than ever before.


Hawaii is at 19.6%. Florida is at 19.1%, Texas at just 13.2%

Lots of folks in NY and FL retire to TX and FL and avoid all state income taxes on withdrawals.

That’s a big sacrifice to make to avoid paying taxes.

PA doesn’t tax retirement income of any kind, public or private, though they also don’t give you a tax break for money put into a Traditional IRA. Sadly, we did most of our TIRA deposits there, paying the PA income tax on it, and then moved to VA where we now pay VA income tax on withdrawals or conversions.

IP

>>Lots of folks in NY and FL retire to TX and FL and avoid all state income taxes on withdrawals.<<

That’s a big sacrifice to make to avoid paying taxes. - mendomann

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Again, injecting some politics into the board, eh mendomann. Just can’t help yourself, can you.

What do you say IP, should we pretend this didn’t happen?

Not actually clear to me that it’s politics oriented, though that certainly could be the unstated intended spin. I would avoid those two states, and many others, just based on the heat and the flatness of the land.

IP

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My parents had the best of both worlds.

My dad worked 44 years in NYC. Paid NY state tax. Paid NYC tax. He lived in NJ, so when NJ started income tax, he got credit for taxes already paid.

When he retired, he moved out of very urban now suburb to two places. THey had bought a manufactured home in FL in the smallest incorporated community there to spend winters. They built a nice house on Lake George NY for the summer months although it was ‘winterized’ with heat, super good windows, oil fired hot water heat, etc.

Changed his tax residence to FL. Registered cars and got FL drivers license.

Made sure he spend less than 180 days a year in NY. Now he did pay high real estate taxes in NY being ‘on the lake’ but enjoyed being there.

When he retired, many of his friends were ‘at work’. Most of time, we went to a small summer house on weekends (Home built) walking distance to lake in NW NJ. Or off exploring somewhere.
Some friends and relatives dropped by during summer. Nice, quiet and not crowded. They had lived in same house in NJ for 30 years. Sold the place in NW NJ.

I suspect that many of the over 65s in NY are still working to pay the bills, or living on SS. Quite a few fat pensions from city/local/state government agencies, too to help out a bit.

Over 65 is 15% of the entire population there - about equal to the number of people in the state under 18. That doesn’t bode well for finances as older folks typically don’t work or work only part time, consume community resources, and probably are a net drain. Over 10% of over 65s live in ‘poverty’.

t

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IP" I would avoid those two states, and many others, just based on the heat and the flatness of the land"…

Well, FL is pretty flat. I think the highest point in southern FL is a highway overpass.

However, you’ve got 9000 foot mountains and 7 different mountain ranges in TX.

https://vacationidea.com/texas/most-beautiful-mountains-in-t…

You could live in Alpine TX. Might get to 100 in the day time but drops to 60 at night in summer time. Passive houses work well there. Think Adobe walls - almost zero need for a/c. In winter, open shades. Sun warms house. Little heat needed at night.

https://en.wikipedia.org/wiki/Alpine,_Texas

t

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Thank you for recommending this post to our Best of feature.

Well, FL is pretty flat. I think the highest point in southern FL is a highway overpass.

LOL! You got the rec for that!

Desert (You’re joking right?) Dave

Well elevation in Florida is interesting.

The maximum height of the Tampa Bay Sky bridge is 430 feet. Tallahassee is 203 feet and google say the highest point is someplace called Britton Hill at 345 feet.

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and in Key West, the highest point is “Mt Trashmore” site of old WWII and onward landfill. Actually many rumors that it contains some not so healthy heavy metal debris - blamed on causing all sorts of maladies….???

Recall the days when your toothpaste tube was made of lead. Mercury in thermostats and thermometers.

Yes, there are toxic metals there. But they are natural materials. We should learn to deal with them.

My BIL, now retired, Architect, Geology Masters degrees, worked his last 15 years at the EPS after earlier stints of prospecting for uranium, then oil from Colorado, into he Gulf. But the EPA attracted him, he oversaw some of the West Coast cleanups, such as Hunter’s Point Naval Shipyard and various old mines jere in the West… So he’s my go-to guy for geology things of interest… Also why we were interested enough to swing by, spend time at the WIPP site near Carlsbad as we wander the Southwest… A pretty awesome site, storing anything for thousands of years is a daunting task… Best solution, one day, it to blast them off into the Sun, but nobody wants to pay the money for that, so far…

Heavy metals are natural, just not too healthy for us… We’ve a lot of feldspar. mercury ore, deposits, old mines, and just natural outcrops all around… Odds are tons on mercury has ended up in the muddy bottom of SF Bay, I can imagine a huge pool of liquid mercury down under the mud, if we’d only look for it…

So peaceful on the surface, but, deep down… shiny stuff…