Does Indiana Tax Your IRA Distributions?

Individual Retirement Arrangements (IRAs) are common savings vehicles designed to help individuals save for retirement. These accounts offer tax advantages, which vary depending on whether the IRA is a Traditional or Roth account. When funds are withdrawn from an IRA, these withdrawals are known as distributions, and their tax treatment can differ significantly at both the federal and state levels. Understanding how these distributions are handled for state income tax purposes is a key aspect of retirement planning.

Indiana’s Taxation of IRA Distributions

Indiana aligns with federal guidelines concerning the taxability of retirement income, including distributions from IRAs. The state imposes a flat income tax rate, which is 3.05% as of 2025, on most forms of taxable income. If an IRA distribution is considered taxable income at the federal level, it will be subject to Indiana’s state income tax.

Distributions from a Traditional IRA are subject to Indiana state income tax. This is because contributions are often made on a pre-tax basis or are tax-deductible, meaning the funds have not yet been taxed. Therefore, both the original pre-tax contributions and any accumulated earnings become taxable upon withdrawal.

In contrast, qualified distributions from a Roth IRA are tax-free in Indiana, mirroring their federal tax treatment. For a Roth IRA distribution to be considered qualified, it must meet specific criteria: being made after the account holder reaches age 59½, becomes disabled, or dies; or used for a qualified first-time home purchase up to $10,000. The Roth IRA must also have been established for at least five years before the distribution. Non-qualified Roth IRA distributions, which do not meet these requirements, may result in the earnings portion being subject to ordinary income tax and potentially a 10% early withdrawal penalty.

Indiana Exemptions and Deductions for IRA Distributions

While many IRA distributions are taxable, Indiana offers certain exemptions and deductions that can reduce an individual’s overall state tax liability. Taxpayers aged 65 or older may be eligible for a general exemption of $1,000. An additional $500 exemption is available for those aged 65 and above whose adjusted gross income does not exceed $40,000. These exemptions apply to an individual’s total taxable income, including any taxable IRA distributions.

An exclusion exists for eligible retired public safety officers. If a distribution from a qualified governmental retirement plan is used to pay for accident or health insurance premiums or long-term care insurance premiums, up to $3,000 can be excluded from federal taxable income. This federal exclusion reduces the amount of income subject to state tax, provided the funds are paid directly from the plan to the insurance provider. This exclusion applies to distributions from governmental plans, not all types of IRAs.

Indiana also provides an exemption for military retirement pay for individuals aged 60 or older. This exemption specifically targets military retirement income and is not directly tied to IRA distributions. Civil service annuity recipients aged 62 or older may claim a deduction of up to $16,000 on their Indiana tax return if the annuity income is included in their federal adjusted gross income. These deductions and exemptions can help lower the overall taxable income reported in Indiana, providing tax relief for certain types of retirement income.

Reporting IRA Distributions on Indiana Tax Forms

Taxpayers who receive IRA distributions must accurately report them on their Indiana state income tax forms. Full-year Indiana residents use Form IT-40, the Indiana Full-Year Resident Individual Income Tax Return. If an individual was a part-year resident or a nonresident with Indiana-source income, Form IT-40PNR is required.

Information for state reporting is primarily derived from federal tax forms, particularly Form 1099-R, which details distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, and insurance contracts. Taxable IRA distributions are typically included in the overall adjusted gross income reported on the federal Form 1040, which then flows to the Indiana state return. On forms such as IT-40PNR, specific lines, like Line 10 for IRA Distributions, are used to enter the taxable portion.

For full-year residents using Form IT-40, the taxable amount of an IRA distribution, as determined on the federal return, is incorporated into the calculation of Indiana adjusted gross income. Ensure that any non-taxable portions, such as qualified Roth IRA distributions or previously taxed contributions, are correctly excluded from the taxable amount reported. If state income tax was withheld from an IRA distribution, the payer may be required to file Form 1099-R directly with the Indiana Department of Revenue.