Will N.J. tax me on older IRA withdrawals?

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Q. We have been retired for 10 years now and are considering a move to New Jersey. Is it true that New Jersey taxes all prior IRA withdrawals when you move to the state from another state? We’re considering the move but if we have to pay a cumulative tax on prior withdrawals made while living in another state, it’s a deal buster.
— Thinking about it

A. Here’s what you need to know.

First, New Jersey does not go back and tax income you took in the form of IRA distributions prior to becoming a New Jersey resident.

However, New Jersey’s tax treatment of both IRA contributions and distributions does deviate from the Internal Revenue Service’s code, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

For example, he said, the state does not allow for a tax deduction in the year a New Jersey resident contributes to a traditional IRA.

“So if a New Jersey resident’s entire balance in a traditional IRA consisted of contributions to a traditional IRA, when these funds are withdrawn, only the earnings component would be taxable for New Jersey purposes,” he said.

The state offers an IRA worksheet to calculate what portion of the IRA withdrawal is taxable for New Jersey purposes, he said.

“This can get complicated, for example, in the case of an IRA rollover account solely comprised of assets from a 401(k) where the contributions were excluded from New Jersey income, then future IRA distributions would be fully taxable for New Jersey,” he said. “This also assumes zero 401(k) after-tax contributions.”

See this publication by the state for further detail.

But there is some other good news.

If you qualify, your IRA distributions might be excluded from your New Jersey income under the state’s pension exclusion.

You need to be age 62 or older and have total income of less than $100,000. If you qualify, the exclusion is $100,000 for married couples and $75,000 for singles, he said.

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This story was originally published on April 16, 2021.

NJMoneyHelp.com 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.