Are 401k Withdrawals Taxable in South Carolina?

When planning for retirement, understanding how your income will be taxed is important. For residents of South Carolina, the state has specific regulations regarding the taxation of income from retirement savings plans such as a 401(k). A 401(k) withdrawal is the act of taking money out of your employer-sponsored retirement account. How these distributions are taxed can impact your financial picture, as South Carolina’s approach involves its own rules and deductions that differ from federal guidelines.

South Carolina’s Taxation of Retirement Income

South Carolina’s state income tax system uses the federal Adjusted Gross Income (AGI) as its starting point. This means that money you withdraw from a traditional, pre-tax 401(k) is included in your federal AGI and is initially considered taxable income by the state. Withdrawals from a traditional 401(k) are taxed upon distribution.

Conversely, qualified distributions from a Roth 401(k), which is funded with after-tax dollars, are not taxed by the federal government and are not taxed by South Carolina. While your 401(k) withdrawal is presumed taxable, South Carolina law provides for certain subtractions that can lower the amount of retirement income subject to state tax.

The South Carolina Retirement Income Deduction

A feature of South Carolina’s tax code for retirees is the Retirement Income Deduction. The rules for this deduction are based on the taxpayer’s age. For individuals under the age of 65, a deduction of up to $3,000 can be claimed against qualified retirement income. This is an annual limit and applies to the total of all eligible retirement distributions received during the tax year.

For taxpayers who are age 65 and older, the benefit is more substantial, permitting a deduction of up to $10,000 of retirement income. This is a total deduction limit. For married couples filing a joint return, each spouse who receives retirement income can claim the deduction based on their own age and income.

Calculating the Taxable Portion of Your Withdrawal

The calculation is straightforward once you identify the correct deduction amount based on your age. It is a simple subtraction from your total withdrawal amount for the year. For instance, a taxpayer who is 62 years old and withdraws $20,000 from their 401(k) is eligible for the $3,000 deduction. The calculation would be $20,000 minus the $3,000 deduction, resulting in $17,000 of the withdrawal being taxable by South Carolina.

In another scenario, a 67-year-old taxpayer withdraws the same $20,000. Being over 65, they can claim the larger $10,000 deduction. Their taxable portion would be $20,000 minus the $10,000 deduction, leaving $10,000 subject to state income tax.

Reporting 401k Withdrawals on Your State Tax Return

After calculating the taxable portion of your 401(k) distribution, you must correctly report it on your state tax return on the South Carolina Individual Income Tax Return. The deduction itself is claimed as a subtraction from income. You will list the calculated deduction amount on the specific line designated for retirement income subtractions.

It is also important to account for any state taxes that may have already been paid. The financial institution that manages your 401(k) may have withheld South Carolina income tax at the time of the withdrawal. This information is provided to you on federal Form 1099-R, which you will receive from the payer. The amount of state tax withheld should be clearly indicated on this form and must be reported on your state return as a tax payment you have already made, which will reduce any final tax liability you may have.