How NJ taxes your retirement accounts

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Q. I have to take my Required Minimum Distribution (RMD) by the end of this year. Why does New Jersey tax my RMD when I paid New Jersey taxes on each year on money that I contributed to my IRA or 401(k).
— Taxed

A. Come on, you live in Jersey. You know the state will tax you at every opportunity!

Your IRA, 401(k) and pension are no different — unless you have a basis in that retirement account.

You accumulate basis when you make a contribution to a tax-deferred retirement account and you do not get a tax deduction for that contribution, said Patricia Daquila, a certified public accountant with Lassus Wherley in New Providence.

She said certain retirement accounts are not tax deductible for New Jersey, and you would have basis for those contributions.

But your federal basis can differ from your New Jersey basis, Daquila said, therefore the taxable amount of your distributions for federal tax may differ from the state.

“Contributions to a 401(k) plan are tax deferred for New Jersey if the contributions were made after Jan. 1, 1984,” Daquila said. “However, 401( k) contributions made prior to Jan. 1, 1984 were not tax deductible and you would have accumulated basis for those contributions.”

Even contributions to plans prior to your New Jersey residency are treated in the same way had you been a New Jersey resident, she said, noting it’s important to keep accurate records and statements to calculate what your basis is in the retirement plan.

There are several methods you can use to calculate the taxable amount for New Jersey depending on the type of retirement plan, Daquila said. You can use the three-year rule method, a general rule method and a worksheet for IRA withdrawals.

Daquila said there are worksheets and explanations in the New Jersey 1040 instructions which can be found online.   It’s what you’d use to determine which method to use and in order to calculate the New Jersey taxable amount of your RMD.

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This post was first published in May 2016. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.