05 Mar IRA withdrawals and the pension exclusion

Q. I am a married and a retired New Jersey resident. The combined income for my wife and me, including pension and IRA withdrawals but excluding Social Security, will total about $70,000 in 2017. In view of the increasing pension and retirement income exclusion in 2018, should I defer a $25,000 withdrawal from my IRA until 2018?
— Planning ahead

A. Thinking ahead about your tax liability and creating an advantageous strategy is smart.

The pension exclusion in New Jersey is set to increase $20,000 a year until it tops out at $100,000 in the year 2020 for joint return filers.

And if you earn more than $100,000, you’re ineligible for the exclusion.

This year, 2018, a married couple may exclude up to $60,000 of their otherwise taxable pension and IRA withdrawals, said Cynthia Fusillo, a certified public accountant with Lassus Wherley in New Providence.

“Since your pension/IRA income this year is approximately $70,000, you will use all of the current $60,000 exclusion, leaving approximately $10,000 of the income as taxable at the state level,” Fusillo said. “Therefore, yes, it would make sense to defer an additional $25,000 IRA withdrawal until next year, when the exclusion will be $80,000 for joint filers.”

Just make sure that you take your Required Minimum Distributions (RMDs), even if the withdrawal will push you over the income limit for the New Jersey exclusion.

“You don’t want to run afoul of the RMD rules and risk penalties at the federal level,” she said.

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This post was first published in March 2018.