topic Re: 401k earned vs. unearned in State tax filing

401k earned vs. unearned

Avery56 — Mon, 10 Feb 2025 18:32:57 GMT

My husband and I each took a 401k total distribution in 2024. We live in Minnesota and I am no trying to determine if we are eligible for a marriage credit on the Minnesota M1MA form. W2 income ("earned") counts towards the credit but 401k income does not. I realize that 401k income is deferred but logically I earned it and paid taxes on it just as I did with the W2 income, the only difference was in the timing of taking pay/ paying the taxes. Why are these two types of work earned income treated differently when it comes to the M1MA? Thanks for any enlightenment.

Re: 401k earned vs. unearned

Bsch4477 — Mon, 10 Feb 2025 18:55:35 GMT

Tax law defines a distribution from a retirement account as unearned income. We are not privy to the reason for the law.

Re: 401k earned vs. unearned

ThomasM125 — Mon, 10 Feb 2025 19:00:13 GMT

Pension distributions are not considered earned income, even though it was earned when you originally received the associated income, but only in part. The distributions from your pension plan area a combination of earnings on the contributions, which is clearly not earned income, and a return of the amount you contributed. Consequently, It may make sense to treat some of it as earned income, but that is not how the tax code works. I assume it has to do with the fact that tax on the income is deferred, so you already have one benefit so allowing you to treat a portion of the income as earned would be doubling up on benefits.