Confusion About NJ Pension 3 Year Rule

[BarbaraNJ]

I am age 61. I was age 60 at the end of 2023.

I retired from State of NJ July 2023. I received a pension payment every month from July till Dec 2023

I also received a W2 from my employer as I was working for 2023.

All of my NJ pension deductions from my paycheck were pretax for Federal but after tax for NJ

My annual pension is $18,000. My lifetime contributions to my plan were $57,291.77

I did not make any adjustments to my 2023 income tax return for NJ. I entered exactly what was on my 1099-R form.

It looks like it will take more than 3 years to recover my member contributions.

Was I supposed to make an adjustment to my 2023 NJ income tax return for this ?

Do I need to make an adjustment to my 2024 NJ income tax return ?

I am using Turbo Tax Premier ( also used it last year).

Thank you.

[fanfare]

If you Google both NJ rules, the first hit for each should explain the difference to you.

@BarbaraNJ 

[BarbaraNJ]

Thanks very much for your reply. I already did that previously and I am still confused and thought The Community could help clarify.

Thanks again, I appreciate your response.

Barbara

[fanfare]

"It looks like it will take more than 3 years to recover my member contributions."

If you will not recover your contributions within 36 months from the date you receive your first payment from the plan you must use the General Rule. 

@BarbaraNJ 

[BarbaraNJ]

Yes, that's what I thought also. But I didn't do any of that last year so I guess I would have to file an amended return for NJ for 2023.

For this year, I will use the General Rule and hope Turbo Tax Premier can calculate it correctly.

Again, your advice and responses have been very much appreciated.

Thanks

Barbara

[geilcourt]

But wait, my wife having retired (as a NJ teacher) in 2017, I see that her after-tax contributions she paid are NOT the first sums of money she's receiving in her pension, only a fraction of them. In fact, if the "Total employee contributions" amount is correct, then she'll be nearing 100 years old before she gets all the after-tax contributions back. The difference between the (box 1) "Gross distribution" and the (box 2a) "Taxable amount" is clearly the value placed in the box numbered 5 ("Employee contributions or insurance premiums").

I've seen this spelled out in various publications online, that your total after-tax contributions are returned to you over the next, say, 26 years or so (if your life expectancy is 26 years, then the "Total employee contributions" figure is divided by 26 and you get just 1/26th of it back each year (make sure you live 26 years or you will lose out!).

In my wife's case, her total contributions were $624.27 (according to the first 1099-R), so divide by her life expectancy of 21.7 years, and you get her current $28.80 tax-free allowance (the difference between her "gross distribution" and her "taxable amount" is indeed $28.80).

Look at your first 1099-R after retiring... it shows your actual (box 5) "Employee contributions...", but beware, this figure is ONLY shown on your first 1099-R. It's like pulling teeth, trying to find out later what that figure was (it's nowhere to be seen on MBOS).

Now the one thing that's also puzzling in all this, is that you say you paid AFTER-TAX contributions to NJ, but that supposedly hasn't been the case since January, 1987 (TPAF Member Guidebook)! And as far as I can make out from her pay stubs, hers DO appear to have been almost all after-tax. And yet, the Office of Client Services letter she got from the (NJ) Division of Pensions and Benefits states that her "contribution to the pension plan was $109,756.15 (it doesn't confirm whether this was pre-tax or post-tax).

No wonder we're all confused! And the NJ taxation amounts go through conniptions every time you try a different rule setting!

[BarbaraNJ]

Sounds like your wife retired under TPAF pension plan.  Her deductions from her paycheck were deferred for Federal ( but not State of NJ) income tax.

When she started to collect, her pension payments became taxable for Federal income taxes.

Her pension payments will not be taxable for NJ income taxes until she has recovered her contributions.

For example, if her pension payments received are $20,000 per year but her lifetime pension contributions deducted from her paycheck were $80,000, then she would indicate the General Rule as she will not recover her contribution in a 3 year period. Her pension will not be taxable every year until she reaches the $80,000 amount ( 4 years).

The pension payments from her plan are not calculated on what she paid in, it is a calculation based on her last 5 years of salary divided by 55 and then multiplied by a percentage. Her plan is NOT a defined contribution plan where your pension payments are based on what you paid in.