NCPA - National Center for Policy Analysis

Some States Have Lower Limits Than Feds on Savings Plans

January 9, 2002

Federal law now allows individuals to invest up to $3,000 in tax-favored IRA savings plans. But some states still limit investments to $2,000 -- meaning that those investing $3,000 in a deductible Individual Retirement Account could owe state taxes on $1,000.

While some states are in the process of making adjustments to their laws, others that are faced with large budget deficits are reluctant to adopt changes that could cost them revenues.

  • At least 14 states have laws which conflict with increased federal savings limits on 401(k), IRAs and other tax-friendly savings plans.
  • Experts report the biggest trouble spot to be California -- where the top state tax rate is 9.3 percent.
  • California is facing a $12.4 billion deficit -- and changing its laws to make them compatible with federal law would cost $44 million in revenue.
  • Benefits experts aren't sure how states would tax excess contributions - but in a worst case scenario a state could determine an entire plan no longer qualifies for special tax treatment.

Some employers aren't allowing workers to increase contributions to their retirement plans until the issues are resolved. Some experts say that because raising the amount of contributions is voluntary, some companies believe the safe answer is to do nothing.

Source: Sandra Block, "Some 401(k), IRA Savers Could Face State Tax Bills," USA Today, January 9, 2002.

For text


Browse more articles on Tax and Spending Issues