28 Mar Can I get back tax paid to N.J. on retirement contributions?
Q. On a 403(b) rollover to a 401(k), what’s the best way to do this so I don’t pay taxes again on the 403(b) contributions? What happens if the 401(k) is with another employer and I am no longer a resident of New Jersey? How do I recover the tax paid on 403(b) contributions to the state?
— Out of Jersey
A. There are a few things to unpack here.
We’ve got good news and bad news for you.
First, New Jersey does follow the federal treatment of 401(k) plans maintained by for-profit employers, but it does not allow for taxable wages to be reduced by contributions to 403(b) plans maintained by tax-exempt organization employers, said Neil Becourtney, a certified public accountant and tax director with Smolin, Lupin & Co. in Red Bank.
Accordingly, you will need to keep track of the contributions made historically, for as you begin receiving distributions from your 401(k) plan in future years, a portion of the distributions will be nontaxable representing your recovery of the prior year 403(b) plan contributions, Becourtney said.
You can find more information on this subject from Publication GIT-1&2, Retirement Income, which includes a worksheet on which to make the yearly calculation.
The good news is that all states are barred from taxing retirement distribution income received by a nonresident taxpayer, Becourtney said.
“If you move to a state that imposes a personal income tax, you may be subject to tax on this income in that state — some states with a personal income tax do not tax retirement distribution income — but you will avoid New Jersey tax if you are no longer a resident of the Garden State,” Becourtney said.
If you move to a state that does not impose a personal income tax, such as Florida, you will pay no state income tax on this income, he said.
“The bad news is that you will not recoup the additional New Jersey tax you paid in prior years resulting from your wages not being reduced by the 403(b) contributions made. That would only occur if you remain a New Jersey resident,” he said.
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This story was originally published on March 28, 2023.
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