This week, Gail answers several IRA-related questions as we count down to the April 15 deadline for retirement contributions.

Can you please go over the taxes that you are required to pay with a Roth IRA? I know it is federal income tax free at time of withdrawal but what about state and local taxes on those withdrawals?

Thank you.


Dear Victor,

First of all, withdrawals from a Roth IRA are NOT always federally tax-free. Only those that meet the definition of "qualified" escape federal income tax.

A "qualified" distribution is one that is made after the Roth IRA is at least 5 years old and when one of the following is also true:

1. the Roth IRA owner has reached age 59 1/2; or

2. The Roth IRA owner dies and the beneficiary begins withdrawals; or

3. The Roth IRA owner becomes disabled; or

4. The Roth IRA owner withdraws $10,000 toward the purchase of a first-time home.

Since Roth contributions are made with after-tax dollars, these amounts are never taxed again. And they can be withdrawn at any time. Let me restate this so there is no confusion: Roth IRA contributions can be withdrawn tax-free and penalty-free at any time.

But this does not apply to the earnings on those contributions. These could be subject to ordinary income tax as well as a possible 10% penalty if your withdrawal doesn't meet the above definition of "qualified." In addition, earnings on money you converted from a tax-deductible IRA to a Roth could also be hit with a penalty unless you time it right.

In general, states tend to treat Roth IRA withdrawals the same as the federal government. But you can't count on this. Take Pennsylvania, for instance. According to John Logan, the Senior State Tax Analyst at CCH, under Pennsylvania law Roth IRA withdrawals are only considered "qualified"- and therefore tax-free- if the IRA owner is at least age 59 1/2 and retired. There is apparently no five-year requirement and the three other exceptions do not apply.

A complete review of how each and every state taxes Roth IRA withdrawals is beyond the scope of this column. I strongly advise you to speak with a local tax advisor before you withdraw any money from a Roth IRA.

Hope this helps,



In one of your columns you suggested that the spouse, who had no income, start contributing to an IRA. Why should she? Wouldn't she have to pay tax on it at withdrawal? Can her spouse contribute from his income -- and be able to deduct it? If so, I wish I had known that 15 years ago!


Dear Charles,

Let's back up a bit. The only time you can make a contribution to an IRA is if you have "earned" income. This would include salary, commissions, and self-employed income. What doesn't count? Income from an annuity or rental property, dividends or interest on investments, or pension income.

However, if you are a stay-at-home spouse who is married to someone who has earned income, then his/her earned income essentially qualifies you for what's called "Spousal IRA." Thanks to this provision of the tax code, you can <each> contribute to an IRA. The only question becomes: What type of IRA might you qualify for? Tax-deductible? Roth? Non-deductible?

First of all, if neither spouse is covered by a retirement plan through an employer, then both can make tax-deductible contributions to an IRA <regardless how much income they report.>

It gets a bit tricky for a traditional IRA when you are covered by a company-sponsored retirement plan. That's when you have to look at how much income you have based on your tax filing status. Below are the income limits for 2003 if one or both of you are covered by a retirement plan through work:

2003 Modified Adjusted Gross Income

Note that if you are married and file separately, you are not allowed to contribute to either a tax-deductible or Roth IRA unless your "modified adjusted gross income" is less than $10,000. (You read that correctly: ten thousand dollars.)

For 2004, the only thing that changes are to the income limits affecting deductible IRAs; they all went up by $5,000.

For a Roth IRA, you have to consider some income limits as well. Contributions to Roth IRAs are subject to the following income limits, whether or not you or your spouse are covered by a company plan:

All of your IRA contributions for the year are added together and cannot exceed the maximum amount. For 2003 and 2004, this was $3,000. So if you qualified for a $2,000 deductible contribution to an IRA, the maximum you could put into a Roth is $1,000.

Don't forget there is an additional "catch-up" amount that folks age 50 or older can contribute. (You must have turned 50 in the year for which you are making this contribution.) For both last year and this year, that's another $500, or a maximum total IRA contribution of $3,500.

The amount of federal income tax someone has to pay on an IRA withdrawal depends upon the nature of the IRA. Since contributions to a tax-deductible IRA were not taxed at the time you made them, every dollar will be subject to income tax when withdrawn.

By definition, contributions to a non-deductible IRA are made with after-tax money. Since you've already paid income tax on these amounts, they are not taxed a second time when you make a withdrawal. However, the portion of your withdrawal made up of earnings on these contributions, will be subject to income tax.

Finally, Roth IRA contributions are also made with after-tax money, however the benefit of a Roth is that even earnings can escape federal taxation. (See my first answer.)

The reason a non-working spouse would want to contribute to an IRA is that the money has the potential to grow on either a tax-deferred or tax-free basis.

Hope this clears things up,


Are there any instances when IRA/401(k) withdrawals are tax free? Can interest on municipal bonds be withdrawn tax free if the interest is tax free outside of the IRA/401K?


Dear Mark,

Yikes! Do NOT invest money inside any type of retirement plan in municipal bonds. It's the rules which cover your retirement plan -- not the rules governing municipal bond interest -- which determine how withdrawals are taxed. (For IRAs, see above.)

While interest paid by muni bonds is federally tax-free when the bonds are owned outside a retirement account, if the bonds are owned inside a deductible IRA every dollar withdrawn will be taxed at ordinary income tax rates (as high as 35% currently).

The only time IRA withdrawals are completely tax-free is when they're coming out of a Roth -- and only if your withdrawal complies with the regulations. (See my first answer.)


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