09 Jan Will N.J. tax this retirement plan change?

Q. My wife had a 403(b) plan that we had transferred to an IRA rollover at our brokerage company after she retired in March 2017. She was 61. Now we want to convert some of that account into a Roth IRA. I know that we have to pay federal income tax on the transfer, but what about New Jersey? There were no state tax deductions taken for the contributions, so does that mean no state tax upon conversion? She also had a 401(a) plan into which her employer’s matching contributions were deposited. What happens to those?
— Husband

A. You’re correct that your decision to convert part of the account to a Roth IRA will have tax consequences.

For starters, you will be subject to federal income tax on the value of the IRA rollover that is converted to a Roth IRA, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

“Since you did not get a New Jersey tax deduction for the employee contributions that your wife made to her employer’s Section 403(b) plan, the employee contributions component of the account balance being converted to a Roth IRA would not be subject to New Jersey tax,” Becourtney said. “However, investment earnings, along with any employer contributions included in the Roth IRA conversion, would be subject to New Jersey tax.”

As far as the Sec. 401(a) plan balance that hold the employer contributions, that plan balance, upon conversion to a Roth IRA, will be fully taxed by New Jersey, Becourtney said.

You can read more at the state’s Tax Topic Bulletin GIT-2, IRA Withdrawals.

Becourtney said the major incentive for establishing a Roth IRA is that qualified distributions are not taxable for either federal or New Jersey purposes.

Direct Roth IRA contributions are not deductible, but conversions from traditional IRAs are taxable as a trade-off for obtaining future tax-free distributions, he said.

“If you plan on moving from New Jersey to either a state with a lower tax rate structure such as Pennsylvania, or to a state with no income tax, such as Florida, you will end up paying New Jersey tax on the conversion, yet you will not benefit from the tax-free distribution treatment for New Jersey since you would no longer reside in the Garden State,” he said. “States are prohibited from taxing IRA distributions received by a nonresident taxpayer.”

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