What will happen is that after you move into the new state which doesn't tax on withdrawal, then you can release the money tax free.

You should wait until you have established intent of residency in the new state. This means getting a driver's license, obtaining a home, and registering to vote. Make sure you read the states tax guidelines on establishing residency. Each state will have their own definition of residency.

Don't forget about the 10% penalty if you withdraw too early. Also, if you withdraw all of the money at once then you may be put into higher federal tax bracket. This may offset any gains you made to save money by moving to another state. Also, have you considered staying in the same state and withdrawing small amounts at a time?

PA is the only state that does this with 401k contributions. Other states have retirees that find what would be tax free retirement income in their state isn't transportable, either.

Unfortunately, other states don't need to reciprocate on the tax free status you'd have gotten in PA for your 401k withdrawal after retirement, should you move. You'll have to pay the state income tax on withdrawals if they are taxable in your new state.

This seems like double taxation. I paid taxes to PA in the year when the 401(k) contribution was made, then I have to pay taxes to another state on the same money (plus interest/dividends, of course) when I withdraw it. It seems as if there should be some sort of federal regulation that prevents paying taxes twice on the same money.

I don't disagree with you.

Yet, just because the feds make those contributions exempt from federal tax does not mean that the states have to follow through, the states have autonomy to make and levy their own taxes.

It's not that I mind paying state taxes on the money. And of course each state has the right to levy its own taxes. Those are not the issues. The issue is when the same money is taxed twice, once by each state, which is effectively penalizing people for moving to another state.

It seems like the reverse situation may also be true, where no state taxes are paid on this money even in states that would normally tax 401(k)'s. For example, if you live in a state that only taxes 401(k) withdrawals then retire in PA (the opposite of what I am contemplating), then you would end up paying no state taxes on the money even though both states normally tax 401(k) money.

The manner for taxing 401(k) money, whether as contributions or withdrawals, should be consistent from state to state. The only way I can see for this to happen is for the federal government to mandate which method 401(k)'s shall be taxed if a state imposes a tax on 401(k) money. Yesterday I wrote a letter to my U.S. representative regarding this issue. I do not expect it to change this issue, but rather just to make her aware. I'll do the same for my U.S. Senator. I'm not sure the state representatives would care.

Imagine if one state had an income tax and no sales tax, and a neighboring state had a sales tax and no income tax. I think I would reside in the state that only levied a sales tax and live close to the border with the state that only levied an income tax. It's kind of like that with PA and DE, as DE has no sales tax (but does tax income). Maybe that's what I should do - reside in PA to save on 401(k) withdrawal taxation but live close to DE where I would make most of my purchases to save on sales tax. Then again, DE has very low property taxes, so maybe it might pay in the long run to move to DE and bite the bullet on 401(k) withdrawal taxes while saving big-time on the sales and property taxes. What a country we live in!

My husband closed his 401k account . He lives and works in Florida did not pay Maryland income taxes. The account was managed through local 26 or IBEW So the account was closed and they took state taxes" Md" According to our accountant he is not to pay State taxes for Md Please clarify this for me Thank you..