Question

do we have to pay pennsylvania state tax for early withdrawal of 1099-R.

Answer 1

Code 1 & 2 Early distribution. This distribution is taxable for PA purposes, unless: (1) your pension or retirement plan was an eligible plan for PA PIT purposes, and (2) you retired after meeting the age conditions of the plan or years of service conditions of the plan. If your plan was not an eligible plan, or if you have not attained the age or years of service required under the plan to retire, you must determine the PA taxable amount of your distribution. You must use the cost recovery method. This means that you previously paid PA income tax on your contributions to the plan. Therefore, Pennsylvania will not tax your distributions until you have received (recovered) an amount equal to your previously taxed contributions. Consult your plan administrator as to your previously taxed contributions to the eligible Pennsylvania retirement plan.

Code 3 or 4 Death/disability distribution. This is a distribution due to death and/or disability. A distribution due to death is not taxable for PA purposes - unless included with Code D (see Annuities below). A distribution due to disability generally is not taxable for PA purposes (See Annuities below).

Code 7 Normal Distribution. This distribution from an eligible Pennsylvania retirement plan is not taxable if you met the plan requirements (the age and/or years of service required by the plan) for retirement, and retired after meeting those requirements.

Most retirement and pension income is exempt from Pennsylvania income taxes. For traditional pensions, you must have reached the eligibility requirement for separation from service by retirement based on old age, infirmity, long-continued service, or a combination of those factors.

Pennsylvania also has favorable treatment for IRAs. Distributions from an IRA are not taxable for Pennsylvania purposes if the payments are received on or after reaching the age of 59-1/2. In addition, any payments made to the estate or designated beneficiary of the IRA owner because of the owner's death are free from Pennsylvania income tax.

Early withdrawals: no exceptions
IRA distributions received before turning 59-1/2 aren't eligible for the exemption and are therefore fully taxable under Pennsylvania income tax law. This is the case even if you've retired from work before reaching age 59-1/2.

Moreover, even though some situations would prevent you from having to pay early withdrawal penalties on early distributions for federal tax purposes, Pennsylvania doesn't recognize those exceptions for state tax purposes. For instance, IRA owners can receive substantially equal periodic payments before age 59-1/2 without paying an early withdrawal penalty, but Pennsylvania imposes tax on distributions made using that method. Similarly, federal penalty exceptions for items like a first-time home purchase don't apply in Pennsylvania.

Finally, Pennsylvania taxes certain distributions from Roth IRAs if they're made before reaching age 59-1/2. Taxpayers have to pay tax if their withdrawal exceeds the amount of contributions that were previously subject to Pennsylvania income tax.

The obvious solution for Pennsylvania taxpayers is to do whatever you can to avoid taking IRA withdrawals before reaching age 59-1/2. Doing so will prevent you from having to include those withdrawals in your state taxable income and preserve more of your money for tax-free treatment in retirement.