28 Sep If I take from my 401(k), what happens with state taxes?

Q. If I withdraw $100,000 from my 401(k) plan under the CARES Act, I understand I won’t pay a penalty and I have three years to pay the tax. I also know I can deposit the funds back into an IRA in three years. What rules apply for state tax?
— Unsure

A. Under the CARES Act, taxpayers who are affected by the virus can take out retirement funds without a 10% penalty, as you said, and you would have three years to pay it back or pay the federal taxes due.

First, you must qualify for a coronavirus-related distribution per IRS rules, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

Then, here’s what happens with your federal tax burden.

“Ordinary income tax would still be owed, however, the ordinary income taxes owed would be spread over three years rather than in 2020,” Maye said. “You are also correct that if the money is paid back within the three years, you can file an amended federal tax return and recover any taxes paid on the 401(k) distribution.”

Unfortunately, Maye said, New Jersey has not adopted this federal COVID-related tax relief.

So the income would be fully taxable as ordinary income in New Jersey, he said.

This story was originally published on Sept. 28, 2020.

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