New Jersey stopped taxing 401(k) contributions in 1984. Unless you made contributions before January 1, 1984, your 401(k) distribution is fully taxable.
The income that is taxed by New Jersey each year is determined on your New Jersey tax return, not by anything on your paycheck. The New Jersey tax that is withheld from your paychecks is just a down payment towards the tax for the year that is calculated on your tax return. It's the New Jersey wages in box 16 of your W-2 that determines what income is taxed by New Jersey. Ask your payroll department to show you how the New Jersey wages in box 16 of your W-2 are calculated. Box 16 does not include 401(k) contributions.
