Interest on treasury bills in IRA exempt from state income tax?

[ssr025]

I have treasury bills in a taxable account and the interest is exempt from California state income tax. I also have  treasury bills in my IRA and was wondering if it's possible that this interest income could also somehow be treated as exempt from state income tax when distributed from my IRA.

[Critter-3]

ALL income of any kind in a tax shelter like an IRA  is tax DEFFERED never tax exempt.  The income is reported when you take distributions from the IRA and the distribution is always considered ordinary income. 

[Opus 17]

Unfortunately, putting tax-exempt investments in an IRA means you lose the tax exempt benefit.  Everything you contribute is pre-tax, therefore everything you withdraw is taxed.  There is no way to track separate assets or asset classes, everything you withdraw is taxed, end of story.  You may want to rethink your investment choices. 

[ssr025]

Thanks for responding. I figured that was the case but wanted to double check to confirm in case there was some type of workaround that would allow the state income tax exemption.

[HDShrader327]

If you download Oregon Pub 17 and start reading on page 77, you will find that the accumulated Interest from Treasury bonds, etc are tax exempt for an IRA distribution on a pro-rated basis. There is a very good worksheet that demonstrates how this works. I would imagine that this would have to be the case for all states, but maybe not spelled out as well as Oregon does in Pub 17. Believe me, if Oregon didn't have to exempt it from income taxes, they wouldn't.

*** I can not vouch for any State other than Oregon ***

[Mike9241]

Tell us the state if it isn't Oregon. state laws vary and some states do tax the entire IRA distribution even if it there is US interest involved. Others like Illinois don't tax IRA distributions at all. 

[ssr025]

Thanks for the Oregon info.  I'll have to check California to see how they address this.

[HDShrader327]

FYI, you can also see a printscreen of how it was entered in Turbotax for Oregon in 2020 in the "Oregon credit for federal retirement income" discussion in 2020.

[SteamTrain]

@HDShrader327 @ssr025   @Mike9241 

Instructions for OR, and an example,  are actually on page 88 of the 2022 OR Pub 17   (not sure of other years). [[appears to be the same on p80 of the 2020 OR pub 17, or p86 of the 2021 Pub 17]]

I doubt that TTX will do this calculation for you....and I personally suspect that most states won't allow it , nor bother with the complexities of verifying your calculations.  Keeping track year-to-year, with folks re-investing interest/dividends in the same, or other funds within their IRA...., it would end up being a tracking nightmare.

(now I'm off to check my NC rules...just in case)

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( later edited in For NC:  The NC state tax rules for subtraction of interest/dividends from US Govt bonds/securities includes:

"This deduction does not apply to any portion of a distribution from an Individual Retirement Account (IRA)."

(last sentence on this page:  Interest Income from U.S. Obligations | NCDOR  )

[HDShrader327]

Thanks for the correction - I was looking at the 2019 version of Oregon Pub 17 by mistake. TurboTax actually does the calculation in the Oregon State forms. Yes, you do need to keep records for every year that the IRA earns Federal interest. Fortunately, Charles Schwab (maybe others?) has the total YTD Federal interest earned in my IRA reported on every statement so I just keep that page from all the December statements.

[SteamTrain]

Interesting that TTX helps with the calcualtion.....thought int might be too obscure.

They did not appear to include other pension account types, like a 401k.  Subtraction code 315 specifically prohibits pension distributions from taking this subtraction,,,but does not break down into traditional/401k/457/403b...etc

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For CA, I went thru their 2021 Pub 1005:

That pub doesn't' split out any pension/retirement type...just says:

"Pensions invested in U.S. Government Securities. If your pension plan invested in U.S. Government securities or in mutual funds that invested in U.S. Government securities, you may not reduce the taxable portion of your pension distribution by the amount of interest attributable to the U.S. Government securities."

[ssr025]

Figured that California wouldn't allow an exemption for this. Thanks for finding the answer.