In 2006 I took out a $45K loan from my 401K to purchase a house in Florida. 4 years later I transferred to Colorado and was laid off in 2012. I could not pay off the loan but since I was 60 I simply told them to treat it as a disbursement. I don't mind paying the federal tax, but do I have to pay Colorado State Income Tax on the money - I received the money 4 years before I moved to Colorado. Why should they profit at my misfortune?

You should get 1099-R from the company when it actually treats it as a disbursement. In the year of disbursement if you are a resident of Colorado, you will pay Colorado state tax.

You took a disbursement while a resident of CO, so that's why CO can tax it. If you're thinking that the disbursement should somehow be retroactive to four years ago when you received the loan money - the problem with that idea is that the money was not really "yours" then - it was a loan, a debt that you owed, not income. You defaulted on the loan 4 years later, and at that moment the money changed from being a debt to an asset. Same thing happens when a credit card loan is forgiven - it counts as income at the time of forgiveness, not at the time that the charges where made on the card.