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These plans areexcluded from tax on your federal return, but not onyour state income tax return. Once you retire and beginto receive pension benefits, you will pay federal tax onyour retirement payments, but you will not pay PA taxon those benefits.
You have to pay income tax on your pension and on withdrawals from any tax-deferred investmentsâsuch as traditional IRAs, 401(k)s, 403(b)s and similar retirement plans, and tax-deferred annuitiesâin the year you take the money. The taxes that are due reduce the amount you have left to spend.