Are teachers double-taxed on their retirement accounts?

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Q. I am a recently retired teacher. I contributed to my 403(b) for ten years. I was given the tax deferment when I was paid, but then I was made to pay state tax when I filed my return. Therefore, I did not receive a state tax deferment for this contribution, only federal. When it comes time to take this money out, I will be taxed again by the state – double taxation! What do you suggest I, and my fellow teachers, do?
— Retired teacher

A. Teachers are indeed taxed twice, but they’re not double-taxed, on their 403(b)s.

Teachers pay New Jersey state tax and payroll taxes (FICA) on what they contribute to their 403(b)s, said Jeanne Kane, a financial planner with JFL Total Wealth Management in Boonton.

That’s the first tax.

“When the teacher retires and starts taking distributions from their 403(b), they will be taxed on what they earned in excess of what they put in, so only the gains – interest, dividends, investment growth – on the 403(b) are taxed,” Kane said. “This is the second tax.”

Kane said it’s extremely important for teachers to keep track of what was contributed in order to ensure that the taxes are calculated correctly.

This is especially true with a rollover, she said.

“When it comes time to make a withdrawal, the only portion taxable by New Jersey is the gain,” she said. “So, teachers are not double-taxed, but a portion of the 403(b) is taxed when it is put in and another portion is taxed when it is taken out.”

The key is to know how much was put in so that part doesn’t get included in the amount taxed again, she said.

Keep in mind that while New Jersey taxes the contributions on the way in and gains on the way out, the federal government will take their taxes on the entire distribution, she said.

“Also note that if a teacher moves out of state, the new state does not care that taxes have already been paid to New Jersey. That money is lost,” Kane said. “State taxes will need to be paid to the new state when a distribution is taken.”

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This story was originally published on April 4, 2019.

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