New Jersey does not tax distributions from 401(k) retirement accounts. This includes both traditional 401(k)s and Roth 401(k)s. New Jersey’s income tax is based on federal adjusted gross income. When you take a distribution from your 401(k), the amount of the distribution is added to your federal adjusted gross income. However, New Jersey allows you to subtract the amount of the distribution from your New Jersey taxable income. This means that you will not have to pay New Jersey income tax on the distribution.
New Jersey Taxation of 401(k) Distributions
Whether New Jersey taxes 401(k) distributions depends on several factors, including residency status at the time of distribution and the type of distribution received. Here’s a guide to help you understand New Jersey’s tax treatment of these distributions:
Resident Tax Implications
- Traditional 401(k) Distributions: Generally, traditional 401(k) distributions are taxed as ordinary income in New Jersey. This means the amount you withdraw from your traditional 401(k) will be added to your other taxable income for the year.
- Roth 401(k) Distributions: Unlike traditional 401(k)s, qualified Roth 401(k) distributions are not subject to New Jersey state income tax. This is because Roth 401(k) contributions are made with after-tax dollars, so they are not taxed when withdrawn.
Non-Resident Tax Implications
Non-residents of New Jersey who receive a 401(k) distribution from a plan sponsored by a New Jersey employer may be subject to New Jersey’s “jock tax.” This tax applies to non-residents who earn income from New Jersey sources, including 401(k) distributions. However, if the non-resident lives in a state that has a reciprocal agreement with New Jersey, they may be exempt from the jock tax.
Table: Summary of New Jersey 401(k) Distribution Tax Treatment
| Distribution Type | Resident Tax Implications | Non-Resident Tax Implications |
|---|---|---|
| Traditional 401(k) | Taxed as ordinary income | May be subject to jock tax |
| Roth 401(k) | Not taxed | Not taxed |
State Income Tax Treatment
New Jersey follows the federal tax treatment of 401(k) distributions.
- Qualified Distributions: Distributions made after age 59½ or upon retirement, death, or disability are generally taxed as ordinary income at the recipient’s federal and state income tax rates.
- Non-Qualified Distributions: Distributions made before age 59½ (unless an exception applies) are subject to an additional 10% federal early withdrawal penalty. New Jersey also imposes a 10% early withdrawal penalty, which is added to the federal penalty.
- Substantially Equal Periodic Payments (SEPPs): Withdrawals made under a SEPP, which provides for regular payments based on life expectancy, are generally taxed favorably (i.e., taxed more gradually over the life of the SEPP).
It’s important to consult with a tax professional or refer to official tax resources for specific guidance on the tax treatment of 401(k) distributions in New Jersey.
| Taxable Income | Tax Rate |
|---|---|
| $0 – $20,000 | 3.5% |
| $20,001 – $35,000 | 5.525% |
| $35,001 – $40,000 | 6.37% |
| $40,001 – $75,000 | 7.62% |
| $75,001 – $150,000 | 8.97% |
| $150,001 and above | 10.75% |
Impact of Age
The tax treatment of 401(k) distributions depends on the recipient’s age at the time of the distribution.
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Age 59½ or Older: Distributions made after the recipient reaches age 59½ are generally eligible for the most favorable tax treatment. If the funds are withdrawn after age 59 1/2, they are taxed as ordinary income and may be subject to a 10% early withdrawal penalty if taken before age 59 1/2. However, there are exceptions to the penalty for certain circumstances, such as taking withdrawals for medical expenses, higher education costs, or a first-time home purchase.
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Age 55 to 59½: Distributions made between ages 55 and 59½ may be subject to the 10% early withdrawal penalty. However, this penalty may be avoided if the distribution is made due to separation from service (e.g., retirement or termination of employment).
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Age 50 to 54: Distributions made between ages 50 and 54 are subject to both the 10% early withdrawal penalty and ordinary income tax.
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Before Age 50: Distributions made before age 50 are subject to the 10% early withdrawal penalty and ordinary income tax. In addition, the distribution may be subject to an additional 10% tax if it is not rolled over into another qualified retirement account within 60 days.
It’s important to note that these rules apply to federal income taxes. State income tax rules may vary. New Jersey, for example, does not have a state income tax on 401(k) distributions.
| Age | Early Withdrawal Penalty | Ordinary Income Tax |
|---|---|---|
| 59½ or Older | No | Yes |
| 55 to 59½ | Yes (unless due to separation from service) | Yes |
| 50 to 54 | Yes | Yes |
| Before Age 50 | Yes | Yes |
Federal Tax Regulations
Federal tax regulations govern the taxation of 401(k) distributions:
- Tax-Free Contributions: Employee contributions made before taxes (pre-tax) are not taxed when distributed. However, any earnings on these pre-tax contributions are taxed as ordinary income.
- Taxed Earnings: Any earnings generated by both pre-tax and post-tax contributions are taxed as ordinary income.
- Required Minimum Distributions: After age 72, individuals must take required minimum distributions (RMDs) from their 401(k) account. These distributions are fully taxable.
| Contribution Type | Taxation at Contribution | Taxation at Distribution |
|---|---|---|
| Pre-Tax Contributions | Not taxed | Taxed on earnings (ordinary income) |
| Post-Tax Contributions | Taxed | Taxed on earnings (ordinary income) |
| Earnings on Contributions | Not taxed | Taxed on all earnings (ordinary income) |
Thanks for hanging out with me and learning about New Jersey’s stance on 401k distributions. Now you’re all set to make informed decisions about your retirement savings. If you have any more money-related questions, be sure to swing back by and visit again later. I’ll be here, ready to dish out more financial wisdom and keep your money matters straight.