05 Mar Confusion over pre- and after-tax contributions

 Q. I made payroll contributions to a 403(b) when I was employed in New Jersey in 1983. However, I don’t remember — and have no way of finding out — if these contributions were included in my taxable New Jersey and federal income. My 1983 W-2 shows that my federal and state income amounts were identical, but I can’t tell if my income included or excluded my 403(b) contributions. I am retired, and when I take my distributions, I need to know if I already paid tax on my contributions. What can I do?

A. This can be complicated.

Payroll contributions to 403(b) and other tax-deferred retirement accounts such as 401(k)s are typically made on a pre-tax basis — unless the participant specifically elects to contribute on an after-tax basis.

If the contributions were in fact made on a pre-tax basis, they should not have been included in your taxable federal income, said Charles Pawlik, a certified financial planner with Lassus Wherley in New Providence. However, New Jersey generally does not allow for 403(b) contributions to be excluded from taxable state income.

“Although your W-2 showed equal federal and state income, it is possible that your contributions may not have been shown properly in New Jersey wages on your W-2,” Pawlik said. “You may be able to verify how much in the way of pre-tax versus after-tax contributions were made to your 403(b) plan by logging on to your plan administrator’s website, or by giving the plan a call.”

The total contributions made to your plan, and whether or not those contributions were pre-tax or after-tax, should be part of the record-keeping done by the plan administrator, he said.

In addition, your plan administrator will generally detail the taxable portion of your distributions on Form 1099-R, which you receive for the tax year in which the distribution is made.

You can also request written confirmation from the plan administrator in terms of the portion of the distribution that is attributable to after-tax amounts, he said.

“If you are able to obtain this information from your plan administrator and plan on rolling any portion of your balance over to an IRA, it is important to note that IRS Form 8606 should be filed for after-tax amounts contributed to the IRA,” Pawlik said. “IRS Form 8606 lets the IRS know what amount represents after-tax assets, and helps you keep track of the balance of your IRA that should be tax-free when distributed going forward.”

He said at the state level, New Jersey does provide a worksheet in its instruction booklet to keep track of previously taxed contributions.

To the extent that the contributions were included in your New Jersey taxable income when made, you would not need to pay New Jersey income taxes on those contributions again when they are withdrawn, Pawlik said. Federal taxes would be owed on pre-tax contributions, and both federal and state taxes would be owed on earnings within the plan.

The taxable distributions you receive from the plan should be adjusted/reduced for those contributions already reported and taxed for either Federal or New Jersey Gross Income tax purposes, he said.

Either way, Pawlik said that knowing the nature of your contributions is not the whole picture in terms of determining the taxable versus nontaxable portion of your distributions.

That’s because distributions from 403(b) plans that include both pre-tax and after-tax amounts are typically made on a pro-rata basis relative to the amount of your pre-tax and after-tax balances in the plan, he said. But there is an exception for after-tax contributions that were accrued prior to 1987.

“For after-tax contributions that were made prior to Jan. 1, 1987, you generally may choose to withdraw only these after-tax contributions on a tax-free basis, versus having to make a pro-rata withdrawal of both pre-tax and after-tax amounts,” he said.

You could also reach out to the tax preparer, if you worked with one, from the time of your contributions. He or she could have your old returns — and Forms 8606 — on file.

With these complexities, you may want to work with a tax professional who can review your documents and information in detail, and assist you with determining the taxability of future withdrawals from your 403(b) plan.

“Ultimately, the responsibility for properly reporting the taxable portion of distributions is yours,” Pawlik said.

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This story was first posted in March 2015.