10 Apr How do I figure out what’s taxable from this retirement plan?

Q. I am getting distributions from a 457(b) plan and used Worksheet B to calculate the excludable amount, which corresponds to my contributions that were taxed in New Jersey. Then, I rolled over a portion of 457(b) to an IRA. How do I calculate the excludable portion on my remaining 457(b) funds and to the new IRA?
— Confused

A. We’re glad you asked.

It’s easy to make a mistake here.

For starters, a 457(b) plan is a tax-advantaged retirement savings plan for employees of state, local, and some nonprofit organizations, allowing them to defer income taxes on contributions and earnings until retirement, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

If you have made contributions to the plan that were not deductible from your state income tax returns then you have “basis” in your plan, he said. Basis is not taxable to the state when you take distributions from the plan, he said.

“If the amount you take out of your retirement plan during the first 36 months equals or exceeds your basis, then you exclude from state taxes the amounts you withdraw until you have withdrawn your entire basis,” he said. “Then 100% of your withdrawals are taxable to the state.”

If you will not withdraw the amount equal to your basis within the first 36 months, then you must use the General Rule to calculate how much of your withdrawals are taxable, he said.

“This calculation is made on Worksheet B,” he said. “When you roll over all or part of your 457(b) plan into a traditional IRA, then your basis becomes comingled within your IRA and you would still use Worksheet B.”

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This story was originally published in April 2025.

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.