TIRA to 401(k) in New Jersey

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josh20
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Joined: Mon Apr 13, 2020 3:03 pm

TIRA to 401(k) in New Jersey

Post by josh20 » Mon Apr 13, 2020 3:50 pm

Does anyone know how a rollover of a Traditional IRA to a 401(k) would work for state tax purposes in New Jersey? NJ does not allow for deductions for contributions to IRAs, but does allow for deductions for contributions to a 401(k).

To calculate tax on IRA distributions, NJ provides Worksheet C, which does a similar calculation as IRS Form 8606 to calculate pro rata taxes with the original taxed contribution amounts as NJ basis (see GIT-2).

However, to calculate tax on 401(k) distributions, the only guidance is that distributions are fully taxable if all contributions were made on or after 1984. If some were made before, they provide Worksheet A and Worksheet B to calculate the taxable amount. (see "Section 401(k) Plans" in GIT-1, which has some additional language that may be important)

Moving TIRA balances to a 401(k) is a common maneuver to prepare for a Backdoor Roth IRA contribution. However, I'm worried about the NJ tax implications. Some specific questions:

1) Is the IRA -> 401(k) rollover a taxable event for New Jersey? Would taxes on any earnings in the IRA be owed at the time of the rollover? I assume a 1099-R with reason code G would be issued by the TIRA provider.
2) Is the NJ basis for the IRA lost when moving the balance into the 401(k)? GIT-2 doesn't have specific language for taxes on withdrawals from 401(k) accounts that have rollover balance - all the 401(k)-specific guidance only talks about balances from 401(k) contributions. However, maybe the more general language about "Contributory pension plans" would apply. "In general, your personal contributions to the pension or annuity are taxed when they are made. Those contributions, once taxed, will not be taxed again by New Jersey... You must determine the taxable portion (and the excludable portion if you are a resident) of payments you receive from a pension or annuity to which you have made contributions. For New Jersey purposes, you will use either the Three-Year Rule Method or the General Rule Method to calculate these amounts."

The worst case scenario is that the TIRA contributions are taxed in the way in, then the earnings are taxed on the rollover to the 401(k), then the entire thing is taxed a second time when coming out of the 401(k). I sure hope that's wrong.

P.S. 403(b) contributions (every retirement account other than a 401(k), actually) are also taxable in NJ, so maybe someone who has consolidated a 403(b) account or similar into a 401(k) in New Jersey has faced something similar.

P.P.S I'm assuming that some of the IRA details are irrelevant for NJ tax purposes (whether or not there is federal 8606 basis, whether it is a Traditional IRA vs. SEP IRA vs SIMPLE IRA), and that whether the 401(k) is "solo" is irrelevant.

lakpr
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Re: TIRA to 401(k) in New Jersey

Post by lakpr » Mon Apr 13, 2020 4:16 pm

Fellow New-Jerseyan here. I simply ignored the state tax details when I rolled over my Traditional IRA (and my Rollover IRA) to my 401k back in 2015. The peace of mind is worth it.

My wife is a teacher, and yes the 403b contributions are taxed also as ordinary income, no way around it. They will be taxed a second time when we withdraw, but perhaps not, if we keep the total income from all retirement plans for a couple below $100k. The only escape from such state taxation a second time would be to move to a no-income-tax state like FL or TX or SD.

To answer your question 1: Yes, I got a 1099-R from the IRA custodian with a code of "G" indicating a qualified rollover. No it did not trigger any additional state taxes.

seawolf21
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Joined: Tue Aug 05, 2014 7:33 am

Re: TIRA to 401(k) in New Jersey

Post by seawolf21 » Mon Apr 13, 2020 5:08 pm

josh20 wrote:
Mon Apr 13, 2020 3:50 pm
Does anyone know how a rollover of a Traditional IRA to a 401(k) would work for state tax purposes in New Jersey? NJ does not allow for deductions for contributions to IRAs, but does allow for deductions for contributions to a 401(k).

To calculate tax on IRA distributions, NJ provides Worksheet C, which does a similar calculation as IRS Form 8606 to calculate pro rata taxes with the original taxed contribution amounts as NJ basis (see GIT-2).

However, to calculate tax on 401(k) distributions, the only guidance is that distributions are fully taxable if all contributions were made on or after 1984. If some were made before, they provide Worksheet A and Worksheet B to calculate the taxable amount. (see "Section 401(k) Plans" in GIT-1, which has some additional language that may be important)

Moving TIRA balances to a 401(k) is a common maneuver to prepare for a Backdoor Roth IRA contribution. However, I'm worried about the NJ tax implications. Some specific questions:

1) Is the IRA -> 401(k) rollover a taxable event for New Jersey? Would taxes on any earnings in the IRA be owed at the time of the rollover? I assume a 1099-R with reason code G would be issued by the TIRA provider.
2) Is the NJ basis for the IRA lost when moving the balance into the 401(k)? GIT-2 doesn't have specific language for taxes on withdrawals from 401(k) accounts that have rollover balance - all the 401(k)-specific guidance only talks about balances from 401(k) contributions. However, maybe the more general language about "Contributory pension plans" would apply. "In general, your personal contributions to the pension or annuity are taxed when they are made. Those contributions, once taxed, will not be taxed again by New Jersey... You must determine the taxable portion (and the excludable portion if you are a resident) of payments you receive from a pension or annuity to which you have made contributions. For New Jersey purposes, you will use either the Three-Year Rule Method or the General Rule Method to calculate these amounts."

The worst case scenario is that the TIRA contributions are taxed in the way in, then the earnings are taxed on the rollover to the 401(k), then the entire thing is taxed a second time when coming out of the 401(k). I sure hope that's wrong.

P.S. 403(b) contributions (every retirement account other than a 401(k), actually) are also taxable in NJ, so maybe someone who has consolidated a 403(b) account or similar into a 401(k) in New Jersey has faced something similar.

P.P.S I'm assuming that some of the IRA details are irrelevant for NJ tax purposes (whether or not there is federal 8606 basis, whether it is a Traditional IRA vs. SEP IRA vs SIMPLE IRA), and that whether the 401(k) is "solo" is irrelevant.
IRA->401(k) is not a contribution. It is a rollover. See NJ 1040 instructions page 13
If you roll over a lump-sum distribution from an IRA or a qualified employee pension or annuity plan into an IRA or other
eligible plan, do not report the rollover on line 20a or 20b if it qualifies for deferral for federal tax purposes. The amount rolled over (minus previously taxed contributions) will be taxable when it is withdrawn
I presume your TIRA is all pre-tax at the moment. So I take the instructions to mean the entire rollover is not taxable when rolling into 401(k) as as the entire TIRA basis and future earning attributed to it will be taxable when distributed from 401(k).

Topic Author
josh20
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Joined: Mon Apr 13, 2020 3:03 pm

Re: TIRA to 401(k) in New Jersey

Post by josh20 » Mon Apr 13, 2020 5:16 pm

Great, thanks! So the taxability of the IRA -> 401(k) rollover event is settled. I guess the remaining question is whether the IRA contributions that end up in the 401(k) can count as previously taxed contributions, and whether that can be plugged into the Three-Year Rule Method or the General Rule Method to allow for part of the 401(k) distributions to be tax-free.
Last edited by josh20 on Mon Apr 13, 2020 5:19 pm, edited 1 time in total.

seawolf21
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Joined: Tue Aug 05, 2014 7:33 am

Re: TIRA to 401(k) in New Jersey

Post by seawolf21 » Mon Apr 13, 2020 5:17 pm

lakpr wrote:
Mon Apr 13, 2020 4:16 pm
Fellow New-Jerseyan here. I simply ignored the state tax details when I rolled over my Traditional IRA (and my Rollover IRA) to my 401k back in 2015. The peace of mind is worth it.

My wife is a teacher, and yes the 403b contributions are taxed also as ordinary income, no way around it. They will be taxed a second time when we withdraw, but perhaps not, if we keep the total income from all retirement plans for a couple below $100k. The only escape from such state taxation a second time would be to move to a no-income-tax state like FL or TX or SD.

To answer your question 1: Yes, I got a 1099-R from the IRA custodian with a code of "G" indicating a qualified rollover. No it did not trigger any additional state taxes.
It appears 403(b) distributions are not double-taxed. Upon distribution, you have to account for the contributions previously taxed.
https://www.state.nj.us/treasury/taxati ... n403.shtml

seawolf21
Posts: 670
Joined: Tue Aug 05, 2014 7:33 am

Re: TIRA to 401(k) in New Jersey

Post by seawolf21 » Mon Apr 13, 2020 5:24 pm

josh20 wrote:
Mon Apr 13, 2020 5:16 pm
Great, thanks! So the taxability of the IRA -> 401(k) rollover event is settled. I guess the remaining question is whether the IRA contributions that end up in the 401(k) can count as previously taxed contributions, and whether that can be plugged into the Three-Year Rule Method or the General Rule Method to allow for part of the 401(k) distributions to be tax-free.
Was it previously taxed? I'm assuming not because if it was already taxed to begin with, then you would be rolling it into Roth IRA directly. As the TIRA was not taxed at all, then it would be taxed when distributed from 401(k).

I suppose if it was pre-tax for Fed purposes but post-tax as far as NJ is concern, then you would have to track of how much of it is NJ post-tax.

Topic Author
josh20
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Joined: Mon Apr 13, 2020 3:03 pm

Re: TIRA to 401(k) in New Jersey

Post by josh20 » Mon Apr 13, 2020 5:27 pm

seawolf21 wrote:
Mon Apr 13, 2020 5:24 pm
josh20 wrote:
Mon Apr 13, 2020 5:16 pm
Great, thanks! So the taxability of the IRA -> 401(k) rollover event is settled. I guess the remaining question is whether the IRA contributions that end up in the 401(k) can count as previously taxed contributions, and whether that can be plugged into the Three-Year Rule Method or the General Rule Method to allow for part of the 401(k) distributions to be tax-free.
Was it previously taxed? I'm assuming not because if it was already taxed to begin with, then you would be rolling it into Roth IRA directly. As the TIRA was not taxed at all, then it would be taxed when distributed from 401(k).
The TIRA potentially being rolled into the 401(k) has contributions that were previously taxed by NJ, but were claimed as deductions for federal purposes. Rolling it into a Roth IRA directly would incur a large federal tax burden.

retiringwhen
Posts: 1743
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: TIRA to 401(k) in New Jersey

Post by retiringwhen » Mon Apr 13, 2020 6:12 pm

I looked at this previously and could not find a definitive answer. My suggestion is carefully (as in well preserved record keeping) record the basis (total amount of $ contributed to the IRA) now before rolling over to the 401(K). Before you begin to take distributions, roll the 401(K) w/ the IRA funds back into an IRA. Then you can easily use the NJ Forms to exclude the original basis. If the basis is $2000 or something small you may not want to sweat it. If it is a lot more, keep those records.

My wife has at 34 year old Traditional IRA mixed with some rollover funds from a 401(K) in it, I was able to identify the basis for the IRA from contributions in the mid-1980s. We have been doing Roth Conversions with it and the few $ of basis saves some NJ tax dollars each time. I was able to identify the basis by reviewing old tax returns and in some cases a few very old brokerage statements.

BTW, I assume this is NOT a Rollover IRA from a previous 401(K) plan as such a rollover IRA would not have a basis to exclude.

Topic Author
josh20
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Joined: Mon Apr 13, 2020 3:03 pm

Re: TIRA to 401(k) in New Jersey

Post by josh20 » Mon Apr 13, 2020 7:39 pm

retiringwhen wrote:
Mon Apr 13, 2020 6:12 pm
I looked at this previously and could not find a definitive answer. My suggestion is carefully (as in well preserved record keeping) record the basis (total amount of $ contributed to the IRA) now before rolling over to the 401(K). Before you begin to take distributions, roll the 401(K) w/ the IRA funds back into an IRA. Then you can easily use the NJ Forms to exclude the original basis. If the basis is $2000 or something small you may not want to sweat it. If it is a lot more, keep those records.

My wife has at 34 year old Traditional IRA mixed with some rollover funds from a 401(K) in it, I was able to identify the basis for the IRA from contributions in the mid-1980s. We have been doing Roth Conversions with it and the few $ of basis saves some NJ tax dollars each time. I was able to identify the basis by reviewing old tax returns and in some cases a few very old brokerage statements.

BTW, I assume this is NOT a Rollover IRA from a previous 401(K) plan as such a rollover IRA would not have a basis to exclude.
Are you suggesting only rolling the amount of the NJ IRA basis from the 401(k) to the IRA when you want to start taking distributions? If so, I'm a little skeptical that NJ would allow for designating the source of the partial 401(k) -> IRA rollover in that manner. Seems more likely that they would allocate the source pro-rata.

retiringwhen
Posts: 1743
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: TIRA to 401(k) in New Jersey

Post by retiringwhen » Mon Apr 13, 2020 7:53 pm

josh20 wrote:
Mon Apr 13, 2020 7:39 pm
retiringwhen wrote:
Mon Apr 13, 2020 6:12 pm
I looked at this previously and could not find a definitive answer. My suggestion is carefully (as in well preserved record keeping) record the basis (total amount of $ contributed to the IRA) now before rolling over to the 401(K). Before you begin to take distributions, roll the 401(K) w/ the IRA funds back into an IRA. Then you can easily use the NJ Forms to exclude the original basis. If the basis is $2000 or something small you may not want to sweat it. If it is a lot more, keep those records.

My wife has at 34 year old Traditional IRA mixed with some rollover funds from a 401(K) in it, I was able to identify the basis for the IRA from contributions in the mid-1980s. We have been doing Roth Conversions with it and the few $ of basis saves some NJ tax dollars each time. I was able to identify the basis by reviewing old tax returns and in some cases a few very old brokerage statements.

BTW, I assume this is NOT a Rollover IRA from a previous 401(K) plan as such a rollover IRA would not have a basis to exclude.
Are you suggesting only rolling the amount of the NJ IRA basis from the 401(k) to the IRA when you want to start taking distributions? If so, I'm a little skeptical that NJ would allow for designating the source of the partial 401(k) -> IRA rollover in that manner. Seems more likely that they would allocate the source pro-rata.
No, I am not suggesting a partial rollover either way. I suggest you roll the entire IRA Balance over now, but at retirement, roll the entire 401(K) into an IRA (usually a good idea anyway) and then you can exclude the basis from that IRA just as you would on any other IRA following the worksheet for IRA

I don't know if you have read this guide, but it gives details on the process (and are frustratingly silent on IRA to 401(K) rollover treatment).
https://www.state.nj.us/treasury/taxati ... t1and2.pdf

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