Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, etc?

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InvisibleAerobar
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Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, etc?

Post by InvisibleAerobar » Mon Feb 19, 2018 9:34 pm

I'm getting a pretty rude surprise while doing my taxes, as the state in which I reside (NJ) does not allow me to deduct my TSP contribution. I previously lived in VA, and I was able to deduct TSP contributions (as well as FICA taxes, FSA contribution, and my health insurance premium). As I contributed pretty close to the $18500 limit, this means that the state gets to skim ~$1000 off the top from my TSP. The real hypocrisy here, of course, is that NJ allows the deduction of 401(k) contribution per se, but anything of similar effect (e.g. 403(b), TSP, SEP IRA, etc) get taxed

This got me thinking. What other states are like this? Places I may consider living one day include PA, MD, and DE (with PA being a likely candidate right now). Does any of those state do similarly dastardly deeds? While we are on the topic, I thought there was a NJ law passed circa 2010 that gave TSP and 403(b) the same tax treatment, but apparently that's not the case? Anyone knows what happened to that law/proposed legislation?

muddgirl
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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by muddgirl » Mon Feb 19, 2018 10:10 pm

I live in PA. My understanding is that PA taxes contributions to 401k, traditional IRA, TSP, etc etc.

However, they do not tax qualified distributions.

This means that you could get double-taxed if you contribute in PA and retire in another state, or you could pay zero state taxes if you contribute in another state and retire in PA.
Last edited by muddgirl on Mon Feb 19, 2018 11:04 pm, edited 1 time in total.

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grabiner
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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by grabiner » Mon Feb 19, 2018 10:56 pm

NJ does not double-tax the same income. If you retire in NJ, you prorate your withdrawals into taxable and non-taxable portions as you do with an IRA. (However, the NJ rules still make Roth TSP better; you won't be taxed on your Roth TSP contributions when you make them, and no state will tax the withdrawals.)

You would have the same deductibility problem if you worked in any state with no income tax and retired in a state which taxes retirement withdrawals.
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InvisibleAerobar
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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by InvisibleAerobar » Tue Feb 20, 2018 3:13 pm

thanks for the clarification

what's really irritating is that this only applies to people who don't have company 401(k) and people working in non-profits... That Roth option is looking better by the day, but managing it will be a pain

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Jerry55
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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by Jerry55 » Thu Feb 22, 2018 1:31 am

I grew up in Joisey, and have most of my relatives still there, including my oldest daughter and her husband, my son, and numerous cousins.
I also have my sister, and other relatives in PA, all centrally located near Trenton/Philly area, either side of the Delaware.

NJ is a high tax state, but like mentioned above, they tax it going in, but not out. That's my only info from my experience.

I live in IL, Chicago area, and have told both of them I'd never move back to be close to them for that reason.

IL does not tax it going into my TSP, nor will they tax it upon withdrawal, so, only the FEDs will have their fingers in my TSP pie,
regardless of where I live. I told my daughter to do the ROTH IRA in Jersey, but that advice fell on deaf ears, so, I'll leave that alone.

Good Luck in your choice. I'm retired since 2012 @ 57, will be turning 63 in a few months, and won't take distributions until 70½.

However, I'd certainly check if PA would tax my TSP withdrawals, coz that's the ONLY state of the two that I'd consider moving back to, in that area.
If they did tax it, IL certainly looks like a great place 2 B.
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!

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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by rkhusky » Thu Feb 22, 2018 8:17 am

grabiner wrote:
Mon Feb 19, 2018 10:56 pm
(However, the NJ rules still make Roth TSP better; you won't be taxed on your Roth TSP contributions when you make them, and no state will tax the withdrawals.)
Is this really true? Or does NJ tax Roth and Traditional the same?

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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by nps » Thu Feb 22, 2018 9:37 pm

rkhusky wrote:
Thu Feb 22, 2018 8:17 am
grabiner wrote:
Mon Feb 19, 2018 10:56 pm
(However, the NJ rules still make Roth TSP better; you won't be taxed on your Roth TSP contributions when you make them, and no state will tax the withdrawals.)
Is this really true? Or does NJ tax Roth and Traditional the same?
I think the intended statement was probably "you won't be taxed any differently on your Roth TSP contributions"

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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by grabiner » Thu Feb 22, 2018 9:52 pm

nps wrote:
Thu Feb 22, 2018 9:37 pm
rkhusky wrote:
Thu Feb 22, 2018 8:17 am
grabiner wrote:
Mon Feb 19, 2018 10:56 pm
(However, the NJ rules still make Roth TSP better; you won't be taxed on your Roth TSP contributions when you make them, and no state will tax the withdrawals.)
Is this really true? Or does NJ tax Roth and Traditional the same?
I think the intended statement was probably "you won't be taxed any differently on your Roth TSP contributions"
This is what I intended. NJ doesn't give you any state tax advantage for contributing to a traditional versus a Roth TSP, and does give you a state tax advantage for withdrawing from a Roth TSP.
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InvisibleAerobar
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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by InvisibleAerobar » Fri Feb 23, 2018 6:25 pm

Thanks for the suggestion re: the Roth option. Seriously giving that a thought while I live in NJ. Plan is to move out of the state in the next year, so hopefully it'll become a moot point soon.

I liked the traditional option as with the tax I save, it effectively funds 80% of my Roth IRA. Now that'll be down to 65%. Perhaps still worth it.

Above all, just a bit miffed that I will likely be double taxed for the state contribution, and that they decided to stick it to nonprofits and Feds, b/c they could.

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grabiner
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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by grabiner » Fri Feb 23, 2018 7:10 pm

InvisibleAerobar wrote:
Fri Feb 23, 2018 6:25 pm
Thanks for the suggestion re: the Roth option. Seriously giving that a thought while I live in NJ. Plan is to move out of the state in the next year, so hopefully it'll become a moot point soon.
That makes the Roth even more attractive. If you use a traditional account, you won't get a NJ state tax deduction on your contributions, and you will pay state tax in your new state on the withdrawals, so the same dollars are taxed twice by the state.
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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by nutshellml » Sun Apr 15, 2018 11:04 am

So, if one lives in NJ contributed to Traditional TSP, then retires (in NJ) you're saying that they don' tax the withdrawals? Since you can't deduct your Traditional contributions going in? Doesn't that essential make a Traditional TSP in NJ in theory a Roth when withdrawing it?

Confused, what am I missing? I was always under the impression that NJ is the "worst' place to retire as you get double taxed.

I have, for the majority of my life, lived in NJ, and contributed only to Traditional TSP.

I'm confused...

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grabiner
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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by grabiner » Sun Apr 15, 2018 9:12 pm

nutshellml wrote:
Sun Apr 15, 2018 11:04 am
So, if one lives in NJ contributed to Traditional TSP, then retires (in NJ) you're saying that they don' tax the withdrawals?
Since you can't deduct your Traditional contributions going in? Doesn't that essential make a Traditional TSP in NJ in theory a Roth when withdrawing it?
NJ taxes only the gains, so a traditional TSP/403(b)/IRA is taxed the same as a non-deductible IRA. (NJ does allow deductions for 401(k) plans.)

If you contributed $2000 to the traditional TSP, and it grows to $3000, you pay NJ tax on $1000, but you got no deduction on the $2000 when you contributed it. If you contributed $2000 to a Roth TSP instead, you would not owe any state tax. This makes the Roth TSP more attractive in NJ.
nutshellml wrote:
Sun Apr 15, 2018 11:04 am
Confused, what am I missing? I was always under the impression that NJ is the "worst' place to retire as you get double taxed.
If you are always a resident of NJ, there is no double taxation; NJ doesn't tax any money that it already taxed. Double taxation happens if you work in NJ (and thus don't deduct the TSP contributions) and then retire in another state (and pay tax on your TSP withdrawals). In this situation, the Roth TSP is much more attractive, as Roth contributions are taxed only once by a state.

Conversely, if you live in, say, MD, you can deduct contributions to your traditional TSP. Then, if you retire in NJ, you do not pay tax on the amount you already contributed to the TSP, as NJ treats it as already taxed.
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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by Alan S. » Sun Apr 15, 2018 10:58 pm

Most all of the states that opted to deviate from the IRS contribution rules are in the Northeast.

However, CA had a period of similar non conformity in the early 80s for IRAs:
Nondeductible Contributions Made Before 1987
If you made nondeductible contributions before 1987, none of your distribution is taxed until you have recovered your pre-1987 basis. Because there was a difference between federal and California contribution limits before 1987, there may be a difference in the California and federal taxable amounts. If there is a difference, make an adjustment to reduce your federal AGI to the correct taxable amount for California. Your adjustment is the lesser of your pre-1987 California basis or IRA distribution included in federal AGI. Use Worksheet I — Part A on page 13 to compute your pre-1987 California basis. Use Worksheet I — Part B to compute your adjustment to federal AGI and your remaining pre-1987 California basis. See Example 1 and Example 2 on page 7. Use Worksheet II on page 13, as a summary of your
California basis and its recovery. If you have more than one IRA account, combine all your IRAs to complete the worksheet. If both you and your spouse/RDP have IRAs, you each must complete a separate worksheet based on your own IRA contributions, deductions, and distributions

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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by nutshellml » Mon Apr 16, 2018 8:51 am

grabiner wrote:
Sun Apr 15, 2018 9:12 pm
NJ taxes only the gains, so a traditional TSP/403(b)/IRA is taxed the same as a non-deductible IRA. (NJ does allow deductions for 401(k) plans.)

If you contributed $2000 to the traditional TSP, and it grows to $3000, you pay NJ tax on $1000, but you got no deduction on the $2000 when you contributed it. If you contributed $2000 to a Roth TSP instead, you would not owe any state tax. This makes the Roth TSP more attractive in NJ.
Got it, so basically you need some good record keeping throughout entire career on what you put into your TSP or non-deductible IRA, then basically do the math to see what gains you made, then you pay tax on that?

Does the TSP calculate that for you at the end?

So I guess (like some have mentioned), if I'm planning on retiring in NJ, it would advantageous for me to stop traditional contributions to my TSP and start Roth. I have about 8 years left and 99% of my savings is from Traditional Contributions.

Separate question - so if I were to keep contributing to my traditional TSP, I retire to another state (not NJ). Does each state have their own tax laws as it relates to paying the taxes on your tsp withdrawals?

I'm about 8 years from being eligible, so starting to think about these issues a little more now...

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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by Watty » Mon Apr 16, 2018 9:14 am

grabiner wrote:
Mon Feb 19, 2018 10:56 pm
You would have the same deductibility problem if you worked in any state with no income tax and retired in a state which taxes retirement withdrawals.
You also need to look at the details of the state taxes to figure out the impact.

The issue is that some state have exclusions for some retirement account withdrawals so while the withdrawals may be taxable, you might not be taxed on all of it.

For example here in Georgia the retirement account contributions are deductible on your state taxes while you are working but when you are retired you get an exclusion when you are 65 of where $65,000 ($130,000 for a couple) of retirement income is excluded from state taxes. If you will be retiring in Georgia this makes a Roth much less favorable unless you expect to have very high income in retirement.

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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by talzara » Mon Apr 16, 2018 12:06 pm

grabiner wrote:
Sun Apr 15, 2018 9:12 pm
If you are always a resident of NJ, there is no double taxation; NJ doesn't tax any money that it already taxed. Double taxation happens if you work in NJ (and thus don't deduct the TSP contributions) and then retire in another state (and pay tax on your TSP withdrawals). In this situation, the Roth TSP is much more attractive, as Roth contributions are taxed only once by a state.
If the OP retires in a different state, could the TSP contributions be treated as an accidental Roth?

For non-deductible contributions to a Traditional IRA, the basis gets subtracted when the funds are withdrawn. So there is no double-taxation.

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Re: Which states are similar to NJ in the sense that they do not allow one to deduct contributions to 403b, 457, TSP, et

Post by grabiner » Mon Apr 16, 2018 11:09 pm

talzara wrote:
Mon Apr 16, 2018 12:06 pm
grabiner wrote:
Sun Apr 15, 2018 9:12 pm
If you are always a resident of NJ, there is no double taxation; NJ doesn't tax any money that it already taxed. Double taxation happens if you work in NJ (and thus don't deduct the TSP contributions) and then retire in another state (and pay tax on your TSP withdrawals). In this situation, the Roth TSP is much more attractive, as Roth contributions are taxed only once by a state.
If the OP retires in a different state, could the TSP contributions be treated as an accidental Roth?
No. If you retire in a state other than NJ, your TSP is taxed as if you were always a resident of that state. The amount you contributed was deductible from state tax in the year you deducted it, so it is taxable when withdrawn.

I benefited from this in the opposite direction. When I lived in MI, I contributed to a 403(b), and got a MI tax deduction. I rolled that 403(b) into an IRA, and when I lived in NJ, I converted the IRA to a Roth. The amount I contributed in MI had already been subject to NJ tax (and, for example, would have been reported as income if I had filed a NJ non-resident tax form that year), so it was not taxed a second time when converted; only the gains were taxed.
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