Do You Pay State Income Tax on Inherited IRA Distributions?
Everyone plans for the federal tax bill on an inherited IRA. Almost nobody plans for the state one, and then the first distribution lands and the state wants its cut too. The rule is simple to state and annoying in practice: in most states with an income tax, an inherited traditional IRA distribution is taxed as ordinary income, just like at the federal level. On top of federal tax. In the same year.
Whose state rules apply is the part people get wrong. It is your state, the beneficiary's state of residence in the year you take the withdrawal, not the state where the original owner lived or where the account is held. Your mother could have lived her whole life in Florida, but if you take the distribution while living in California, California taxes it.
The exceptions are real but narrow. Pennsylvania generally does not tax retirement distributions at all, including inherited IRA withdrawals, for state income tax purposes. New York lets residents exclude up to $20,000 a year of pension and annuity income, which includes IRA distributions, but the $20,000 is an aggregate cap across all your retirement accounts in a given year, not per account. A handful of other states exempt part of retirement income or have no income tax at all. Everywhere else with an income tax, expect the distribution to be taxed in full as ordinary state income.
Do you pay state income tax on inherited IRA distributions under the 10-year rule
The SECURE Act's 10-year rule makes the state question sharper. When the original owner died on or after their required beginning date, you now owe annual RMDs during the 10-year window on top of emptying the account by the end of year ten. That schedule can force large withdrawals into years when your other income is already high, which pushes the distribution into higher state brackets too. Our bracket strategy piece covers spreading withdrawals across low-income years; the same logic applies to state brackets, and in a high-tax state the combined marginal rate on a forced distribution year can approach 40 percent.
Two more things worth knowing. First, a qualified distribution from an inherited Roth IRA is generally tax-free at the state level too, since states typically follow the federal Roth treatment. Second, missing a required annual distribution triggers a federal excise tax of 25 percent on the shortfall, reduced to 10 percent if you correct it within the window and file Form 5329. The state does not add its own penalty, but it will happily tax the makeup distribution when you take it.
Before any big withdrawal year, check your own state's current exclusion rules, because they change and the details matter more than the headlines. The federal rules get all the seminar slides. The state return is where the surprise lives.
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Calculate your inherited IRA RMDsFrequently asked questions
Do I pay state income tax on an inherited IRA?
In most states with an income tax, yes. Inherited traditional IRA distributions are taxed as ordinary income at the state level, on top of federal tax. Your state of residence in the withdrawal year controls, not the decedent's state.
Which states do not tax inherited IRA distributions?
Pennsylvania generally does not tax retirement distributions, including inherited IRAs. New York excludes up to $20,000 a year of pension and annuity income in aggregate. States with no income tax do not tax them either. Rules change, so verify your state's current law.
Are inherited Roth IRA distributions taxed by states?
Qualified distributions from an inherited Roth IRA are generally tax-free at the state level too, since states typically follow the federal Roth treatment.
Does the 10-year rule affect state taxes?
Yes. Forced annual RMDs plus the 10-year empty deadline can push large withdrawals into high-income years, which can also push you into higher state brackets. Spreading withdrawals across lower-income years helps at both levels.
Related: The $55,000 Tax Mistake: How to Spread Inherited IRA Distributions Across the 10-Year Window · The Inherited Roth IRA and the 10-Year Rule: What Actually Applies · Do You Have to Take Annual RMDs During the 10-Year Rule? It Depends on One Date
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