Does Wisconsin Tax 401k Distributions?
Understand Wisconsin's tax on 401k withdrawals. While generally taxable, your age, income, and residency can reduce or eliminate your state tax liability.
Yes, Wisconsin taxes distributions from traditional 401(k) plans. When you withdraw money from these accounts in retirement, the state treats the funds as ordinary income, adding the amount to your other income for the year. This income is then subject to the state’s progressive tax rates. The total amount of your 401(k) distribution is included in your Wisconsin gross income, and the specific tax you owe will depend on your total taxable income.
General Taxation of Retirement Distributions
Wisconsin treats distributions from traditional retirement accounts, such as 401(k)s, 403(b)s, and traditional IRAs, as ordinary income. This income is subject to the state’s graduated income tax rates, which for the 2024 tax year range from 3.50% to 7.65%. The specific rate applied depends on your total taxable income and filing status. The state does not offer a special, lower tax rate for retirement income; it is taxed in the same manner as wages.
This tax treatment is because contributions to a traditional 401(k) were not subject to state income tax when earned, and the investment earnings grew tax-deferred. Consequently, the state collects the tax revenue when the funds are distributed to you during retirement.
In contrast, qualified distributions from Roth 401(k)s and Roth IRAs are not taxed by Wisconsin. Contributions to Roth accounts are made with post-tax dollars, meaning you paid state income tax on the money before it went into the account. As a result, both your contributions and investment earnings can be withdrawn tax-free, provided you meet federal requirements for a qualified distribution.
Wisconsin’s Retirement Income Exclusion
Wisconsin offers a tax benefit for certain retirees through its retirement income exclusion. To be eligible, you must be 65 years of age or older by the end of the tax year. This exclusion allows qualifying individuals to subtract up to $5,000 of their retirement income from their Wisconsin taxable income. If a married couple files a joint return and both spouses are 65 or older, each can claim the exclusion for a total of up to $10,000.
The exclusion applies to distributions from qualified retirement plans like 401(k)s and IRAs but is subject to income limitations based on your federal Adjusted Gross Income (AGI). For a single individual or head of household, your federal AGI must be less than $15,000. For those who are married and filing a joint return, the combined federal AGI must be less than $30,000.
Eligibility is based on a strict income cutoff with no phase-out range. If your federal AGI is at or above the stated threshold, you are not eligible for any portion of the exclusion. For example, a single individual with a federal AGI of $14,500 can subtract up to $5,000, but if their AGI was $15,001, they could not claim any of the exclusion.
The Role of Residency Status
Your residency status determines how Wisconsin taxes your 401(k) distributions, with rules differing for full-year, part-year, and non-residents.
Full-Year Residents
If you are a full-year resident of Wisconsin, all distributions you receive from your 401(k) and other retirement plans are subject to Wisconsin income tax. This is true regardless of where you worked or lived when you contributed to the plan. As a resident, your retirement distributions are included in your total taxable income for the state.
Part-Year Residents
For part-year residents, you are taxed only on retirement distributions received while you were a resident of Wisconsin. For example, if you moved to Wisconsin on July 1 and received a 401(k) distribution in August, that distribution would be taxable. Any distributions received before you established residency are not subject to Wisconsin tax.
Non-Residents
Wisconsin does not tax retirement plan distributions received by individuals who are not residents of the state, which is in line with federal law. If you earned money in a 401(k) while working in Wisconsin but move to another state before you begin taking distributions, Wisconsin cannot tax that income. For instance, if you retire from a Wisconsin-based job and move to Florida, subsequent 401(k) payments are not taxable by Wisconsin.
Reporting Distributions on Your State Tax Return
When you receive a 401(k) distribution, your plan administrator sends you Form 1099-R detailing the total amount. You need this form to report the income on your Wisconsin tax return, Form 1. The total distribution from your 1099-R is reported as part of your federal adjusted gross income.
If you qualify for the state’s retirement income exclusion, you must complete Wisconsin Schedule I, Subtractions from Income. On this schedule, you will enter the lesser of your qualifying retirement income or the maximum exclusion amount ($5,000 per qualifying person).
After calculating the total subtractions on Schedule I, you transfer that total to the appropriate line on Form 1. It is important to complete and attach Schedule I to your return to properly document and claim the exclusion.