Does Oregon Tax Your IRA Distributions?
Learn how Oregon's tax system treats IRA distributions. See how your federal return and a specific state tax credit factor into your final Oregon tax bill.
The taxability of an Individual Retirement Arrangement (IRA) distribution in Oregon depends on the type of IRA. For state residents, distributions from Traditional IRAs are subject to Oregon’s personal income tax, as the state’s tax system is tied to federal income definitions. In contrast, qualified distributions from a Roth IRA are not taxed by Oregon. The tax outcome for any withdrawal hinges on the rules for that account and any applicable state tax provisions.
Tax Treatment of Traditional IRA Distributions
Oregon’s income tax framework aligns with the federal definition of adjusted gross income (AGI). If your Traditional IRA distribution is considered taxable on your federal return, it will also be included in your taxable income for Oregon. These distributions are taxed at the state’s ordinary income tax rates, which range from 4.75% to 9.9%. The amount on your federal Form 1099-R is the starting point for determining your state tax obligation.
A portion of your Traditional IRA distribution may not be taxable if you made non-deductible contributions. These contributions were made with after-tax money, creating a “basis” in your IRA. You are not required to pay tax again on this basis when you withdraw it, which prevents the double taxation of the same income.
To determine the non-taxable portion of a distribution, the IRS requires you to use the pro-rata rule. This rule dictates that each distribution consists of a proportional mix of your pre-tax funds and your after-tax funds. The calculation is performed on federal Form 8606, Nondeductible IRAs, and the resulting taxable portion flows through to your Oregon return.
Tax Treatment of Roth IRA Distributions
A “qualified distribution” from a Roth IRA is completely tax-free at both the federal and state levels. To be considered qualified, a distribution must meet two conditions. The first is that the Roth IRA account must have been open for at least five years, beginning with the first tax year for which a contribution was made.
The second condition for a qualified distribution is that the owner must be at least 59½ years old or permanently disabled at the time of the withdrawal. The funds may also be used for a first-time home purchase, subject to a lifetime limit. Because Oregon follows federal tax treatment, any withdrawal that is tax-free on your federal return is also tax-free on your Oregon return.
If a withdrawal does not meet these requirements, it is a “non-qualified distribution.” For these distributions, contributions are considered to be withdrawn first and are always tax-free. After all of your contributions have been withdrawn, you take out the investment earnings. These earnings are subject to Oregon income tax and a potential 10% federal early withdrawal penalty.
The Oregon Retirement Income Credit
Oregon provides a tax credit that can reduce the state tax liability on retirement income, including distributions from a Traditional IRA. This is a nonrefundable credit, meaning it can lower your tax bill to zero, but you cannot receive any part of it back as a refund. Eligibility requires meeting age and income rules for the tax year.
The primary requirement is age; the taxpayer must have been 62 or older. Additionally, there are income limitations. Your household income must be less than $22,500 for single filers or $45,000 for those filing jointly. This income figure is your federal adjusted gross income with certain modifications.
Another requirement involves Social Security or Tier 1 Railroad Retirement benefits, which must be less than $7,500 (single) or $15,000 (joint). The sum of your household income and these benefits cannot exceed $22,500 for single filers or $45,000 for joint filers. The credit is calculated at 9% of your qualified retirement income.
Reporting IRA Distributions on Your Oregon Tax Return
When filing your Oregon state income tax return, the process begins with your federal return. The taxable amount of your IRA distribution, as calculated federally, is the figure that carries over to your Oregon personal income tax return, Form OR-40. This taxable amount becomes part of your total Oregon income.
If you are eligible for the Oregon Retirement Income Credit, you must complete Schedule OR-ASC to claim it. This schedule is filed with Form OR-40 and guides you through the calculation. The result from Schedule OR-ASC is then entered on the designated line in the credits section of your Form OR-40, which directly reduces the amount of Oregon tax you owe. It is important to ensure all calculations are accurate and that you meet all the specific age and income requirements for the credit before claiming it on your return.