How to Save for Retirement in Pennsylvania

Planning for retirement in Pennsylvania requires a thoughtful, personalized approach that accounts for state-specific tax policies, cost of living variations, available retirement programs, and individual financial goals. Unlike some states with no income tax, Pennsylvania offers unique advantages for retirees—particularly in how it treats retirement income—but also presents challenges such as rising property taxes in certain counties and healthcare access disparities. Whether you’re in your 20s just starting your career or in your 50s preparing to transition out of full-time work, understanding how to save for retirement in Pennsylvania is essential to securing long-term financial independence.

The good news is that Pennsylvania provides multiple pathways to build retirement savings, from employer-sponsored plans to state-backed programs and federal tax incentives. This guide walks you through every critical step—from choosing the right accounts to maximizing tax benefits and avoiding common pitfalls—so you can retire with confidence, regardless of where you live in the state.

Step-by-Step Guide

Step 1: Assess Your Current Financial Situation

Before you begin saving, you need a clear picture of where you stand financially. Start by gathering your most recent bank statements, pay stubs, investment accounts, debts, and any existing retirement savings. Calculate your net worth: total assets minus total liabilities. Then, estimate your monthly expenses, including housing, utilities, groceries, transportation, insurance, and discretionary spending.

In Pennsylvania, cost of living varies significantly. For example, Philadelphia and Pittsburgh have higher housing and healthcare costs than rural areas like Clarion or McKean County. Use tools like the MIT Living Wage Calculator or AARP’s Cost of Living Index to compare expenses in your specific county. This baseline helps you determine how much you’ll need to save annually to maintain your desired lifestyle in retirement.

Don’t forget to factor in inflation. The U.S. Bureau of Labor Statistics projects an average annual inflation rate of 2–3%. Over a 20–30 year retirement, even 2% inflation can erode purchasing power by nearly 50%. Your retirement savings goal should reflect this reality.

Step 2: Understand Pennsylvania’s Retirement Income Tax Rules

Pennsylvania is one of the most retiree-friendly states in the country when it comes to taxation. Unlike many states that tax Social Security benefits or pension income, Pennsylvania does not tax any of the following:

• Social Security retirement benefits
• Pension income from state or federal government sources
• Income from 401(k), 403(b), or IRA distributions
• Income from military pensions
• Retirement income from out-of-state employers

This means that every dollar you withdraw from your retirement accounts in Pennsylvania remains fully yours—no state income tax. This is a powerful advantage that can stretch your savings further than in states like New York, New Jersey, or Maryland, where retirement distributions are fully taxable.

However, be aware that Pennsylvania does tax earned income—wages, salaries, and self-employment income—so maximizing tax-deferred or tax-free contributions during your working years becomes even more critical. The goal is to shift as much income as possible into tax-exempt retirement accounts before you retire.

Step 3: Maximize Employer-Sponsored Retirement Plans

If your employer in Pennsylvania offers a 401(k), 403(b), or 457 plan, enroll immediately—even if you can only contribute a small percentage. The power of compound growth over decades makes early participation one of the most effective retirement strategies.

For 2024, the IRS allows individuals under age 50 to contribute up to $23,000 annually to a 401(k) or 403(b). Those aged 50 and older can make an additional $7,500 catch-up contribution, bringing the total to $30,500. Many Pennsylvania employers, including public schools, hospitals, and municipalities, offer these plans. If your employer offers a matching contribution—say, 50% of your contributions up to 6% of your salary—contribute at least enough to get the full match. That’s an instant 50% return on your investment, tax-free.

Example: If you earn $60,000 per year and your employer matches 50% of your first 6% ($3,600), contributing $3,600 results in a $1,800 employer contribution. That’s $5,400 going into your retirement account for just $3,600 out of your pocket.

Set up automatic contributions so you never have to think about it. Even increasing your contribution by 1% each year can dramatically improve your retirement outcome over time.

Step 4: Open a Pennsylvania-Accessible IRA

If you don’t have access to an employer-sponsored plan—or if you want to save more—open an Individual Retirement Account (IRA). Pennsylvania residents can choose between a Traditional IRA or a Roth IRA.

With a Traditional IRA, contributions may be tax-deductible in the year you make them (depending on your income and whether you’re covered by an employer plan), and withdrawals in retirement are taxed as income. However, since Pennsylvania doesn’t tax retirement distributions, the federal tax on withdrawals becomes your only concern.

A Roth IRA offers the opposite benefit: contributions are made with after-tax dollars, but qualified withdrawals in retirement are completely tax-free. Given Pennsylvania’s favorable tax treatment, a Roth IRA is often the better choice for long-term savers. You pay taxes now at your current rate (likely higher than in retirement) and enjoy tax-free growth and withdrawals later.

For 2024, the IRA contribution limit is $7,000 for individuals under 50 and $8,000 for those 50 and older. You can open a Roth IRA through any major brokerage firm—Fidelity, Vanguard, Charles Schwab, or even local Pennsylvania credit unions like PNC or Citizens Bank. Many offer low-fee index funds and automated investing tools.

Step 5: Utilize Pennsylvania’s PA 529 College Savings Plan for Dual Retirement Benefits

While primarily designed for education savings, Pennsylvania’s PA 529 plan can serve as a flexible retirement backup. The PA 529 Guaranteed Savings Plan (GSP) and the PA 529 Investment Plan allow contributions of up to $500,000 per beneficiary over time. If your child or grandchild doesn’t use all the funds for college, you can change the beneficiary to another family member—or withdraw the funds for yourself after age 59½.

Here’s the key benefit: Pennsylvania residents who contribute to a PA 529 plan receive a state income tax deduction of up to $18,000 per year (or $36,000 for married couples filing jointly). This deduction reduces your taxable income in Pennsylvania, effectively lowering your current tax burden while building a tax-deferred account.

While withdrawals for non-education purposes are subject to federal income tax and a 10% penalty, the penalty is waived if you’re over 59½ and the funds are used for qualified expenses like long-term care, housing, or healthcare. This makes the PA 529 plan a powerful hybrid tool: you get an immediate state tax break, tax-deferred growth, and flexibility to use funds for retirement if needed.

Step 6: Explore the PA Secure Choice Retirement Savings Program

Pennsylvania has launched the PA Secure Choice program to help workers without employer-sponsored retirement plans save. Starting in 2025, employers with five or more employees who don’t offer a retirement plan will be required to enroll employees in a payroll-deducted IRA managed by the state.

Employees will automatically be enrolled with a 5% contribution rate (unless they opt out), and contributions will go into a Roth IRA. Employers pay no fees or administrative costs. This program is especially beneficial for workers in small businesses, retail, hospitality, and gig economy roles that historically lack retirement benefits.

Even if your employer is not yet required to participate, you can sign up voluntarily through the PA Secure Choice website. It’s a simple, low-cost way to start saving, with automatic contributions and professionally managed funds.

Step 7: Consider Real Estate as a Retirement Asset

Pennsylvania offers strong opportunities for real estate investment as part of a retirement strategy. Homeownership can serve as both a place to live and a source of equity. If you own your home outright by retirement, you eliminate one of your largest monthly expenses.

Many Pennsylvanians use the “house hacking” strategy: purchasing a multi-family home, living in one unit, and renting out the others to cover mortgage costs. In cities like Harrisburg, Scranton, or Erie, rental yields can exceed 8–10% annually—far higher than the average dividend yield on stocks.

Alternatively, consider downsizing. If you own a large home in a high-property-tax county like Montgomery or Bucks, selling and moving to a smaller home in a lower-tax area like Centre or Cameron County can free up tens of thousands in equity to invest in retirement accounts.

Be cautious with reverse mortgages. While they provide cash flow, they come with high fees and can reduce your estate. Only consider them if you plan to remain in your home permanently and have no other options.

Step 8: Plan for Healthcare and Long-Term Care Costs

Healthcare is the single largest unexpected expense in retirement. According to Fidelity, a 65-year-old couple retiring in 2024 can expect to spend approximately $315,000 on healthcare in retirement—not including long-term care.

Pennsylvania has some of the highest long-term care costs in the Northeast. The average cost of a private room in a nursing home exceeds $110,000 per year. Assisted living averages $55,000–$70,000 annually.

Strategies to manage this risk:

• Contribute to a Health Savings Account (HSA) if you have a high-deductible health plan. HSAs offer triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. Pennsylvania does not tax HSA distributions for medical use.
• Consider purchasing long-term care insurance before age 60. Premiums are lower, and health requirements are easier to meet.
• Explore Pennsylvania’s Partnership for Long-Term Care program, which allows you to protect assets if you qualify for Medicaid after using long-term care insurance.

Step 9: Coordinate Social Security Timing

Social Security benefits are not taxed by Pennsylvania, but they may be taxed federally depending on your total income. To minimize federal taxation, delay claiming benefits until age 70 if possible. For each year you delay past your full retirement age (67 for those born in 1960 or later), your benefit increases by 8% annually.

Example: If your full benefit at age 67 is $2,000 per month, waiting until 70 increases it to $2,640—a 32% boost. That extra $640 per month adds up to over $240,000 over a 30-year retirement.

Use the Social Security Administration’s online calculator to model different claiming strategies. If you’re still working in your 60s, remember that earning above the annual limit ($21,240 in 2024) before full retirement age can reduce your benefits temporarily.

Step 10: Create a Withdrawal Strategy for Retirement

Once you retire, how you withdraw money matters. The 4% rule is a common guideline: withdraw 4% of your retirement savings in the first year, then adjust for inflation annually. However, this rule assumes a 60/40 stock-bond portfolio and may not suit everyone.

In Pennsylvania, since you won’t pay state taxes on withdrawals, focus on minimizing federal taxes. Withdraw from taxable accounts first (if you have any), then tax-deferred accounts (Traditional IRA, 401(k)), and finally tax-free accounts (Roth IRA). This allows your Roth funds to continue growing tax-free as long as possible.

Also, factor in Required Minimum Distributions (RMDs). Starting at age 73, you must begin withdrawing from tax-deferred accounts. Plan ahead: if you have multiple accounts, consider consolidating them to simplify management. Use IRS life expectancy tables to calculate your RMDs accurately.

Best Practices

Start Early, Even with Small Amounts

Time is your greatest ally in retirement savings. A 25-year-old who saves $300 per month at a 7% annual return will have over $700,000 by age 67. Someone who waits until 35 to start saving the same amount will have only $350,000—half as much—despite contributing $36,000 more over time.

Automate Everything

Set up automatic transfers from your checking account to your retirement accounts. Treat retirement savings like a non-negotiable bill. Automation removes emotional decision-making and ensures consistency.

Diversify Your Investments

Don’t put all your money in one asset. Use low-cost index funds that track the S&P 500, total bond market, and international equities. Rebalance your portfolio annually to maintain your target allocation. Avoid chasing hot stocks or trying to time the market.

Review Your Plan Annually

Life changes: promotions, marriages, children, health issues. Review your retirement plan every year during tax season or your birthday. Adjust contributions, beneficiaries, and investment allocations as needed.

Minimize Debt Before Retirement

Carrying credit card debt, personal loans, or a mortgage into retirement reduces your financial flexibility. Aim to be debt-free by age 60 if possible. Pay extra toward high-interest debt first.

Protect Against Scams

Pennsylvania retirees are targeted by fraudsters offering “guaranteed” investment returns or fake government programs. Never give out personal information over the phone. Verify any financial advisor through the Pennsylvania Securities Commission’s website.

Plan for Longevity

People are living longer. A 65-year-old today has a 50% chance of living to 90. Plan for a 30-year retirement, not 15. Build in a margin of safety by saving more than you think you’ll need.

Use Tax-Loss Harvesting

If you invest in taxable brokerage accounts, sell losing investments to offset capital gains. This reduces your federal tax bill and helps you rebalance without triggering large tax liabilities.

Stay Informed About Policy Changes

Pennsylvania’s tax code and federal retirement rules evolve. Subscribe to newsletters from the Pennsylvania Department of Revenue or the AARP Pennsylvania office. Knowledge is your best defense against costly mistakes.

Tools and Resources

Online Calculators

• Retirement Calculator (Vanguard): Estimates how much you need to save based on your age, income, and desired retirement lifestyle.
• Social Security Calculator (SSA.gov): Projects your benefits based on your earnings history.
• PA 529 Savings Planner: Helps model how much you can save for education—and potentially retirement—with state tax deductions.
• Bankrate’s Cost of Living Calculator: Compares expenses across Pennsylvania counties.

State and Federal Resources

• Pennsylvania Department of Revenue: Provides updates on retirement income tax rules and filing requirements.
• PA Secure Choice: Official portal for the state’s automatic IRA program.
• Social Security Administration (SSA): Manage benefits, check earnings records, and apply online.
• Pennsylvania State Employees’ Retirement System (SERS): For public sector workers.
• Pennsylvania Public School Employees’ Retirement System (PSERS): For teachers and school staff.

Financial Advisors and Fiduciaries

Consider working with a Certified Financial Planner (CFP®) who is a fiduciary—legally required to act in your best interest. Look for advisors who specialize in retirement planning and Pennsylvania tax law. The National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA) offer directories to find qualified professionals in your area.

Books and Publications

• The Simple Path to Wealth by JL Collins
• Retire Early with Real Estate by Brandon Turner
• Get a Financial Life by Beth Kobliner
• How to Retire Happy, Wild, and Free by Ernie J. Zelinski

Local Workshops and Nonprofits

Many Pennsylvania libraries, community colleges, and Area Agencies on Aging offer free retirement planning workshops. Organizations like the Pennsylvania Council on Aging and the AARP Pennsylvania Chapter host seminars on tax strategies, healthcare planning, and fraud prevention.

Real Examples

Example 1: Maria, 32, Retail Worker in Pittsburgh

Maria earns $45,000 per year and doesn’t have access to a 401(k). She signs up for PA Secure Choice and contributes 5% ($1,875/year) automatically. She also opens a Roth IRA and contributes $7,000 annually. She invests in a target-date fund with 80% stocks and 20% bonds. She also contributes $2,000 per year to a PA 529 plan for her nephew, claiming the state tax deduction.

By age 67, assuming a 6.5% average return, Maria will have approximately $890,000 in her retirement accounts. She’ll receive $2,200/month in Social Security. With no state income tax on withdrawals, her retirement income is highly efficient.

Example 2: David and Linda, 55, Teachers in Harrisburg

David and Linda have 20 years until retirement. They each contribute the maximum to PSERS and also max out their Roth IRAs. They own their home outright and have $400,000 in taxable brokerage accounts. They’ve paid off their mortgage and have no consumer debt.

They plan to downsize to a smaller home in a lower-tax county after retirement, freeing up $300,000 in equity to invest. They’ve purchased long-term care insurance and will delay Social Security until 70. Their projected annual retirement income: $120,000 from savings, $70,000 from PSERS, and $50,000 from Social Security—totaling $240,000/year before taxes. With no state tax on any of it, their after-tax income remains nearly unchanged.

Example 3: James, 68, Retired Factory Worker in Scranton

James retired early at 62 and started collecting Social Security. He has a Traditional IRA with $250,000 and a small pension. He’s now subject to RMDs and pays federal taxes on withdrawals. He regrets not saving more in a Roth account earlier. He’s now working part-time at a local hardware store to delay RMDs and reduce his taxable income.

James’s story highlights the importance of Roth contributions and delaying Social Security. Had he waited until 70, his Social Security benefit would have been 32% higher—and his RMDs lower due to a smaller IRA balance.

FAQs

Does Pennsylvania tax retirement income?

No. Pennsylvania does not tax Social Security benefits, pension income, or distributions from 401(k)s, IRAs, or other retirement accounts. This makes it one of the most tax-friendly states for retirees.

Can I contribute to both a 401(k) and an IRA?

Yes. You can contribute to both in the same year. However, your ability to deduct Traditional IRA contributions may be limited if you or your spouse are covered by an employer plan and your income exceeds certain thresholds. Roth IRA contributions are not deductible but offer tax-free growth.

Is it better to save in a Roth IRA or a Traditional IRA in Pennsylvania?

For most Pennsylvanians, a Roth IRA is preferable. Since you won’t pay state taxes on withdrawals, the federal tax on Traditional IRA distributions becomes the only tax burden. Paying taxes now with a Roth IRA often results in more after-tax income in retirement.

Can I use my PA 529 plan for my own retirement?

Yes, but with limitations. If you withdraw funds for non-educational purposes before age 59½, you’ll pay federal income tax and a 10% penalty. After 59½, the penalty is waived for qualified expenses. The state tax deduction you received when contributing is not recaptured, making it a viable backup option.

What happens to my retirement savings if I move out of Pennsylvania?

Your retirement accounts remain yours regardless of where you live. However, if you move to a state that taxes retirement income (like New York or New Jersey), your withdrawals may become subject to state income tax. Consider this when planning a potential move.

How much should I have saved by age 50 in Pennsylvania?

A general rule is to have three to four times your annual salary saved by age 50. For someone earning $70,000, that means $210,000–$280,000. However, given Pennsylvania’s low retirement taxes, you may need less than in higher-tax states to achieve the same after-tax income.

Are there any Pennsylvania-specific tax credits for retirees?

Yes. Pennsylvania offers the Property Tax/Rent Rebate Program for low- to moderate-income homeowners and renters aged 65+, widows aged 50+, and people with disabilities. Rebates can reach up to $1,000 annually. Apply through the Pennsylvania Department of Revenue.

Should I work part-time in retirement in Pennsylvania?

Working part-time can reduce the amount you need to withdraw from retirement accounts, helping you avoid higher tax brackets and delaying RMDs. It also provides social engagement and mental stimulation. Since Pennsylvania doesn’t tax Social Security, part-time earnings won’t trigger taxation of your benefits unless your total income exceeds federal thresholds.

How do I protect my retirement savings from inflation in Pennsylvania?

Invest in assets that historically outpace inflation: stocks, real estate, and Treasury Inflation-Protected Securities (TIPS). Avoid keeping too much cash in savings accounts. Adjust your withdrawal rate annually based on inflation and market performance.

Conclusion

Saving for retirement in Pennsylvania offers unique advantages that can significantly enhance your financial security. With no state tax on retirement income, access to powerful savings tools like the PA 529 plan and PA Secure Choice, and a wide range of investment options, you have more control over your future than you might realize.

The key is not to wait. Whether you’re in your 20s or 60s, every dollar you save today compounds into greater freedom tomorrow. Start by assessing your current situation, maximizing employer contributions, opening a Roth IRA, and taking advantage of state-specific benefits. Automate your savings, diversify your investments, and plan for healthcare costs as seriously as you plan for income.

Pennsylvania’s tax structure rewards disciplined savers. Use it wisely. Build a retirement that isn’t just sustainable—but truly fulfilling. With the right strategy, you can enjoy your golden years without financial stress, knowing you’ve made the most of every opportunity the state has to offer.