I'm calling about my required distribution from my IRA. Currently, I have IRAs in several institutions. My first distribution will be from an institution that deals strictly with U.S. Treasuries Normally, these funds are exempt from state income tax. However, I have received conflicting advice as to whether this, being invested as an IRA, is still exempt from state tax when it's time to take distributions.
D.D., Warwick, R.I.
As long as the money remains in your IRA, tax is deferred. When you pull it out, however, income tax consequences arise.
As you know, you must start withdrawing money from your Individual Retirement Account (IRA) at about the time you reach age 70 1/2.
Judging by your question, it appears that you're about to reach the magic age. If so, you'll soon have to face a kind of triple tax whammy:
Your withdrawals will be subject to federal income tax.
Your withdrawals will also be subject to state income tax.
If you're receiving Social Security benefits, your IRA withdrawals could bump up your income enough so that you'll have to pay federal income tax on at least a portion of your benefits. (If some of your Social Security benefits are being taxed, the IRA withdrawals could require tax on a greater portion of your benefits.)
It's true that interest income from Treasury bills, notes and bonds can escape state income tax.
Unfortunately, the rules change when Treasury securities are held inside an IRA. In general, all the money you withdraw from an IRA will be subject to state income tax.
It doesn't matter whether the money came from Treasury securities, money market funds or other types of investments.
It's all taxable. Withdrawals from IRAs also get treated as ordinary income, at federal rates as high as 39.6 percent (although most people are in the 15 percent bracket).
Keep in mind that a portion of your withdrawals may escape the income tax if they're attributable to "nondeductible" contributions -- those for which you never claimed a federal income tax deduction. Remember as well that this column focuses only on traditional IRAs.
With the new Roth IRA, you aren't required to make withdrawals, and any withdrawals you do make may be tax-free.