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Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 8:13 am
by spacely
If next year I am moving from a high tax state to a no tax state for the majority of the year, regarding taxes, is it smarter to front load traditional 401k contributions while living in the high tax state or will I end up owning the same amount either way?

Thanks for any advice!

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 8:53 am
by arcticpineapplecorp.
spacely wrote: Wed Sep 16, 2020 8:13 am If next year I am moving from a high tax state to a no tax state for the majority of the year, regarding taxes, is it smarter to front load traditional 401k contributions while living in the high tax state or will I end up owning the same amount either way?

Thanks for any advice!
in my state I don't get a state tax deduction for 401k contributions, only a federal tax deduction.

and therefore I'll pay federal tax on the withdrawals, but not state tax.

do you get a state tax deduction for a 401k deduction?

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 8:59 am
by ryman554
arcticpineapplecorp. wrote: Wed Sep 16, 2020 8:53 am
spacely wrote: Wed Sep 16, 2020 8:13 am If next year I am moving from a high tax state to a no tax state for the majority of the year, regarding taxes, is it smarter to front load traditional 401k contributions while living in the high tax state or will I end up owning the same amount either way?

Thanks for any advice!
in my state I don't get a state tax deduction for 401k contributions, only a federal tax deduction.

and therefore I'll pay federal tax on the withdrawals, but not state tax.

do you get a state tax deduction for a 401k deduction?
Yes. Most states do. <note, deduction is in the form of "W2 income" reduction, not on any specific line. Just like the feds. Are you sure you aren't getting this?>

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 9:04 am
by MotoTrojan
ryman554 wrote: Wed Sep 16, 2020 8:59 am
arcticpineapplecorp. wrote: Wed Sep 16, 2020 8:53 am
spacely wrote: Wed Sep 16, 2020 8:13 am If next year I am moving from a high tax state to a no tax state for the majority of the year, regarding taxes, is it smarter to front load traditional 401k contributions while living in the high tax state or will I end up owning the same amount either way?

Thanks for any advice!
in my state I don't get a state tax deduction for 401k contributions, only a federal tax deduction.

and therefore I'll pay federal tax on the withdrawals, but not state tax.

do you get a state tax deduction for a 401k deduction?
Yes. Most states do. <note, deduction is in the form of "W2 income" reduction, not on any specific line. Just like the feds. Are you sure you aren't getting this?>
+1 I have never heard of a state that doesn't deduct for 401k contributions. Would love to know where not to move. CA & NJ both do this for HSA transactions (even cap-gains) which is obnoxious since no HSA provider will give you a 1099 annually showing what was done.

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 9:15 am
by arcticpineapplecorp.
MotoTrojan wrote: Wed Sep 16, 2020 9:04 am
ryman554 wrote: Wed Sep 16, 2020 8:59 am
arcticpineapplecorp. wrote: Wed Sep 16, 2020 8:53 am
spacely wrote: Wed Sep 16, 2020 8:13 am If next year I am moving from a high tax state to a no tax state for the majority of the year, regarding taxes, is it smarter to front load traditional 401k contributions while living in the high tax state or will I end up owning the same amount either way?

Thanks for any advice!
in my state I don't get a state tax deduction for 401k contributions, only a federal tax deduction.

and therefore I'll pay federal tax on the withdrawals, but not state tax.

do you get a state tax deduction for a 401k deduction?
Yes. Most states do. <note, deduction is in the form of "W2 income" reduction, not on any specific line. Just like the feds. Are you sure you aren't getting this?>
+1 I have never heard of a state that doesn't deduct for 401k contributions. Would love to know where not to move. CA & NJ both do this for HSA transactions (even cap-gains) which is obnoxious since no HSA provider will give you a 1099 annually showing what was done.
I'm in PA.
Yes, Pennsylvania is one of the few states that does not follow the federal rules on 401(k) contributions. PA does NOT exclude 401(k) contributions from a taxpayers income - thus, making contributions taxable.Jun 4, 2019
source:
https://www.google.com/search?client=fi ... ntribution
PA does not allow for pre-tax employee contributions to any type of retirement plan. Employee contributions to Traditional 401(k), 403(b), 457 governmental, Thrift Savings Plan, Traditional IRA, SEP IRA, and Simple IRA accounts are always after-tax for PA state tax purposes. It is a good idea to keep track of these contributions in the event of an early distribution which would only be PA taxable after all employee contributions have been recovered.
https://www.betterment.com/resources/ta ... residents/
so i suppose if you're in a state that gives deduction for contributions and that rate is higher than the state you move to that has a lower tax on withdrawals that would make sense to front load. For me it makes no difference cuz I'm taxed on the contribution (but tax free on withdrawals provided I stay in PA and rules remain the same in retirement).

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 9:20 am
by MotoTrojan
arcticpineapplecorp. wrote: Wed Sep 16, 2020 9:15 am
I'm in PA.
Yes, Pennsylvania is one of the few states that does not follow the federal rules on 401(k) contributions. PA does NOT exclude 401(k) contributions from a taxpayers income - thus, making contributions taxable.Jun 4, 2019
source:
https://www.google.com/search?client=fi ... ntribution
PA does not allow for pre-tax employee contributions to any type of retirement plan. Employee contributions to Traditional 401(k), 403(b), 457 governmental, Thrift Savings Plan, Traditional IRA, SEP IRA, and Simple IRA accounts are always after-tax for PA state tax purposes. It is a good idea to keep track of these contributions in the event of an early distribution which would only be PA taxable after all employee contributions have been recovered.
https://www.betterment.com/resources/ta ... residents/
so i suppose if you're in a state that gives deduction for contributions and that rate is higher than the state you move to that has a lower tax on withdrawals that would make sense to front load. For me it makes no difference cuz I'm taxed on the contribution (but tax free on withdrawals provided I stay in PA and rules remain the same in retirement).
Very interesting, thanks! So with regards to state taxation, a pre-tax 401k contribution essentially just becomes a Roth contribution, so you still net some benefit (earnings and any trading do not incur taxation). The gotcha would be if you contributed in PA and retired/withdrew elsewhere, you'd get double-taxed.

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 9:27 am
by Stinky
spacely wrote: Wed Sep 16, 2020 8:13 am If next year I am moving from a high tax state to a no tax state for the majority of the year, regarding taxes, is it smarter to front load traditional 401k contributions while living in the high tax state or will I end up owning the same amount either way?

Thanks for any advice!
Welcome to the Forum!

Yes, I'd front-load in the scenario that you describe.

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 9:44 am
by arcticpineapplecorp.
MotoTrojan wrote: Wed Sep 16, 2020 9:20 am
arcticpineapplecorp. wrote: Wed Sep 16, 2020 9:15 am
I'm in PA.
Yes, Pennsylvania is one of the few states that does not follow the federal rules on 401(k) contributions. PA does NOT exclude 401(k) contributions from a taxpayers income - thus, making contributions taxable.Jun 4, 2019
source:
https://www.google.com/search?client=fi ... ntribution
PA does not allow for pre-tax employee contributions to any type of retirement plan. Employee contributions to Traditional 401(k), 403(b), 457 governmental, Thrift Savings Plan, Traditional IRA, SEP IRA, and Simple IRA accounts are always after-tax for PA state tax purposes. It is a good idea to keep track of these contributions in the event of an early distribution which would only be PA taxable after all employee contributions have been recovered.
https://www.betterment.com/resources/ta ... residents/
so i suppose if you're in a state that gives deduction for contributions and that rate is higher than the state you move to that has a lower tax on withdrawals that would make sense to front load. For me it makes no difference cuz I'm taxed on the contribution (but tax free on withdrawals provided I stay in PA and rules remain the same in retirement).
Very interesting, thanks! So with regards to state taxation, a pre-tax 401k contribution essentially just becomes a Roth contribution, so you still net some benefit (earnings and any trading do not incur taxation). The gotcha would be if you contributed in PA and retired/withdrew elsewhere, you'd get double-taxed.
yes and that happens sometimes. My uncle lived in PA but retired in California and I believe that tax situation was not in his best interest, but he moved for other reasons. Don't always let the tax tail wag the investment dog.

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 11:26 am
by fyre4ce
spacely wrote: Wed Sep 16, 2020 8:13 am If next year I am moving from a high tax state to a no tax state for the majority of the year, regarding taxes, is it smarter to front load traditional 401k contributions while living in the high tax state or will I end up owning the same amount either way?

Thanks for any advice!
Welcome to the forum!

Yes, "front-loading" your 401k contributions makes sense in this situation.

However, your post raises another concern to me: you may be under-saving. Normal Bogleheads advice is to save at least 15-20% of one's gross income in tax-advantaged accounts, and we have many members who save far more than that (30, 40, 50, 60% or more). The annual 401k contribution limit for employees is $19,500 in 2020, so if you're able to "front-load" contributions that probably means you're saving around $10,000 or less each year. On a $50,000 salary that could be very reasonable, but if you're earning more, you probably aren't saving enough. The tax savings of a 401k (and IRA, HSA, 529 account, etc) are substantial. What does your budget look like if you save the full $19,500 each year?

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 1:16 pm
by spacely
Thanks everyone for the info and welcomes. I’ve been a long time lurker, I plan on posting more. I will plan on doing the traditional 401k contributions before moving.

As far as retirement account savings rate I am about 25% on >200k. Beyond the traditional limit I have a mega Roth. I know it could be better compared to many on this forum. :happy

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 4:02 pm
by theRoCK
spacely wrote: Wed Sep 16, 2020 8:13 am If next year I am moving from a high tax state to a no tax state for the majority of the year, regarding taxes, is it smarter to front load traditional 401k contributions while living in the high tax state or will I end up owning the same amount either way?

Thanks for any advice!
It would be better to do front-loading, except under certain conditions. If you end up contributing the max amount in the early part of the year, and your company only matches if you have a contribution in that paycheck, then you may save on taxes but end up missing out on employer matching. If you only front load enough to still get employer match in the rest of the year, or if your employer does true-up matching, then it should be ok.

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 4:12 pm
by sailaway
It would depend on other factors as well. If you are moving to a new employer, how do the matches compare?

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Wed Sep 16, 2020 4:18 pm
by CascadiaSoonish
I'd also recommend looking into how front-loading or otherwise changing the contribution schedule impacts employer match. Our current payroll provider is hit-or-miss about continuing employer contributions if the employee contribution limit has been met.

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Thu Sep 17, 2020 3:40 pm
by fyre4ce
spacely wrote: Wed Sep 16, 2020 1:16 pm Thanks everyone for the info and welcomes. I’ve been a long time lurker, I plan on posting more. I will plan on doing the traditional 401k contributions before moving.

As far as retirement account savings rate I am about 25% on >200k. Beyond the traditional limit I have a mega Roth. I know it could be better compared to many on this forum. :happy
I may have misunderstood. I thought you meant contributing extra in 2020 and less or nothing in 2021, 2022, etc. At your income level you should strive to reach the maximum every year. It sounds like you meant front-loading within the year, which is a different situation.

Ideally, get your hands on the plan description for the old and new plans, and see if there are any differences that will matter (most likely, matching). I helped out a friend recently who worked in a job with a 401k that offered no matching, but thought there was a chance he'd get hired by a different company that offered matching. We decided to take a gamble and hold off on contributions at the old job. It paid off - he got hired at the new job late in the year, but was able to reach the maximum and get a match by deferring a huge percentage of his paychecks for the last few months. The better match will probably dominate the decision.

If the matches are equal, one plan or the other could win out if it offers a Roth option, if that's what you want.

Beyond that, yes, making all your contributions from the job in the high-tax state is the right move.

Investment choices shouldn't matter, because you can roll our the money from your old 401k into the new 401k, or an IRA.

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Thu Sep 17, 2020 3:52 pm
by spacely
Yes, sorry for the ambiguity. I am keeping the same job and was talking about just front-loading during the year of the move only. I will continue to contribute in future years. I was thinking if I contribute all pre-tax/19,500 in the first few months it will greatly reduce my state income taxes before I move. I wasn't sure if the state had some way to average out my income versus just looking at what I made during the time I live there. It sounds like that shouldn't happen. I will get a true-up at the end of the year.

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Thu Sep 17, 2020 4:14 pm
by fyre4ce
spacely wrote: Thu Sep 17, 2020 3:52 pm Yes, sorry for the ambiguity. I am keeping the same job and was talking about just front-loading during the year of the move only. I will continue to contribute in future years. I was thinking if I contribute all pre-tax/19,500 in the first few months it will greatly reduce my state income taxes before I move. I wasn't sure if the state had some way to average out my income versus just looking at what I made during the time I live there. It sounds like that shouldn't happen. I will get a true-up at the end of the year.
I suggest you read the tax code of the state where you're leaving. They probably tell you what it takes to qualify as a resident, and how they handle cases of mid-year moves. Most likely, they only tax income you earn while you're either working there, or a resident (residents of states are typically taxed on all income earned worldwide). I'd be very surprised if they tried to tax the income you earn while you're working and living in the new state. Keep documentation of the move so you can prove you weren't a resident if the old state audits you at some point.

Re: Front load years 401k contributions when moving from high tax state to no tax state?

Posted: Mon Sep 21, 2020 12:08 am
by grabiner
arcticpineapplecorp. wrote: Wed Sep 16, 2020 8:53 am
spacely wrote: Wed Sep 16, 2020 8:13 am If next year I am moving from a high tax state to a no tax state for the majority of the year, regarding taxes, is it smarter to front load traditional 401k contributions while living in the high tax state or will I end up owning the same amount either way?
in my state I don't get a state tax deduction for 401k contributions, only a federal tax deduction.

and therefore I'll pay federal tax on the withdrawals, but not state tax.
Note that the withdrawal issue is independent of which state you made the contributions in; therefore, if you are moving between states, you should still prefer to make the contributions in the state which gives a deduction. For example, PA will not tax 401(k) withdrawals in retirement, even if you got a deduction from another state before moving to PA; conversely, if you move out of PA, your new state will tax the 401(k) withdrawals even though you did not deduct the contribution in PA.