Navigating North Carolina’s Retirement Tax Landscape

Article by Jay Tyner, RFC^®

Income in retirement usually comes from three sources: social security, distributions from retirement accounts, and savings and investments.

As you approach retirement or are already in retirement, taxes are a huge consideration when planning your finances. Since most savings are made in pre-tax retirement accounts, i.e., 401k, 403b, and Traditional IRA, taxes should always be considered once it is time to withdraw from a retirement account.

In addition to Federal taxes, In North Carolina, we have a state income tax that needs to be considered when taking distributions from pre-tax retirement accounts. For 2023, the state income tax rate is 4.75%. Beginning in 2024 and continuing until 2026, the North Carolina state income rate will decrease from 4.6% to 3.99%. While this is advantageous to pre-retirees and retirees alike, less money will go to the state, and more money will stay in a person’s pocket, it still means individuals should be cognizant of taxes. That is why we stress at Semmax Financial to speak to your tax professional and a CERTIFIED FINANCIAL PLANNER^® (CFP®) professional regarding tax planning.

Another key point to remember when taking money from pre-tax retirement accounts is to carefully review account holding periods and your age when taking distributions. Taking money from certain retirement accounts too early can cause a tax headache; likewise, taking money from retirement accounts before you turn 59.5 years old can also cause a tax headache.

Here are five tax considerations when pulling money from retirement accounts; as always, speak to your tax professional and/or a CFP® professional before taking money out of retirement accounts.

1. State Income Tax on Withdrawals: North Carolina does have a state income tax. When you make withdrawals from traditional IRAs, 401(k)s, and other tax-deferred accounts, the amount will typically be considered taxable income not only at the federal level, but also at the state level. It’s crucial to account for this when calculating your retirement income needs.
2. Tax Exemption for Certain Retirees: In the past, North Carolina has provided tax breaks for certain retirees, especially those with specific government pensions. While some of these exemptions have changed over time, it’s essential to check the current tax code or consult with a tax professional to see if any exemptions might apply to your specific situation.
3. Roth IRA Distributions: If you have a Roth IRA, and you’ve held it for at least five years and are age 59½ or older, your withdrawals are typically tax-free both at the federal and state levels. This is one of the advantages of having funded a Roth IRA with post-tax dollars.
4. Early Withdrawal Penalties: Withdrawing from retirement accounts before age 59½ can lead to a 10% federal penalty on the amount withdrawn. This is in addition to any regular income taxes owed. However, there are specific exceptions like disability or certain medical expenses, but it’s crucial to be aware and avoid early withdrawals if possible.
5. Required Minimum Distributions (RMDs): Once you reach the age of 72 (or 73, if you reached the age 72 after December 31st, 2022), you are typically required to start taking minimum distributions from your traditional retirement accounts. If you don’t take these RMDs, there can be a hefty penalty. Like the federal government, North Carolina will consider these distributions taxable income unless they come from Roth accounts.

Always remember to consult with a CERTIFIED FINANCIAL PLANNER^® professional to get specific advice tailored to your overall financial situation, and a certified tax professional or CPA for tax advice. Tax laws and regulations can change, so it’s vital to stay informed and plan accordingly.

Take the Semmax Retirement Quiz to determine if you are ready for retirement and better understand what stage you’re in on the road to retirement.

The information contained herein is for educational purposes only. It is not intended to provide, and should not be relied on for, any tax, legal or investment advice. You are advised to seek the advice of a qualified professional prior to making any decision based on any specific information contained herein.

Insurance Products guarantees are subject to the financial strength and claims‐paying ability of the issuing company, and may be subject to restrictions, limitations or early withdrawal fees. Annuities are not FDIC insured.

Links are provided strictly as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. When you access one of these websites, you are leaving our website and assume total responsibility and risk for your use of the website to which you are linking.