New Jersey Tax on TSP 401-k Withdrawal

[JohnsonCharlie]

I took a $50K cash withdrawal from a qualified 401-k Thrift Savings Plan (TSP) that I started in 2003.   I am married, filing jointly.  No NJ tax withheld on 1099-R, Box 12.  Should I use the "General Rule"  in  TurboTax: "select the source of the distribution?  

Thanks for any advice.

[JosephF8]

No your 401k distribution is fully included in NJ income. Contributions made on or after January 1, 1984, were not taxed when they were made. If all of your contributions were made on or after that date, your distributions are fully taxable.

[JohnsonCharlie]

JosephF8,  I actually did pay New Jersey income tax on all my 401-k contributions each year.  Now I am being taxed on the full amount of my withdrawal.   Can I avoid this double taxation?  Thanks for your help.

[JosephF8]

Unless you will recover all of your previously taxed contributions within 3 years you would need to use the general rule. Please note the following.

From the NJ instructions:

401(k) Plans

1. Contributions made on or after January 1, 1984, were not taxed when they were made. If all of your contributions were made on or after that date, your distributions are fully taxable unless your contributions exceed the federal limit. If your contributions exceed the federal limit, you must calculate the taxable and excludable portions of your distributions using one of the methods described under contributory plans.

2. Contributions made before January 1, 1984, were taxed when they were made. If you made contributions before that date, you must calculate the taxable and excludable portions of your distributions using one of the methods described under contributory plans.

[JohnsonCharlie]

Joseph,

I appreciate your response; however, you've neglected to consider that my question involved withdrawals from a Thrift Savings Plan.  Contributions to Federal Thrift Savings Plans are in fact taxed by New Jersey.  I visited a NJ regional information center and contacted the NJ Division of Taxation for an answer to my question.  Both responded in kind:

"New Jersey, unlike the federal, taxed contributions made to a Federal Thrift Savings Plan for gross income tax purposes. These contributions are not taxable at distribution. Only interest, dividends and other earnings, in excess of previously taxed amounts, credited to the Federal Thrift Savings Plan are subject to New Jersey gross income tax when withdrawn.

You may receive a Form 1099R from your employer stating your New Jersey taxable distribution. Also, the New Jersey IRA worksheet (Worksheet C) is designed to help the taxpayer calculate the taxable portion of a withdrawal of retirement account income for New Jersey gross income tax purposes. You can also contact your former employer or payroll company for additional information regarding contributions to the Federal Thrift Savings Plan."

I believe this is a key mistake in the TurboTax program where an entry for a TSP withdrawal in the Federal return is automatically written to the State return without default guidance to Worksheet C.  The only workaround is to open the form for a Pension and IRA Worksheet (should be called Worksheet C) and enter values manually.  Not a desirable option.

Anyway, problem solved.  

[DAG3]

I am in the same situation.  I am confused about reporting my tsp info in turbo tax.  Can you please explain how you did it for the state of NJ?  Thanks

[AmyC]

NJ taxed the money when you earned it so it is not taxable now.

1. You enter the 1099-R in federal.

2. You select that it was earned in NJ.

3. Where is this Distribution From? Select General Rule because:

If you made contributions to your retirement plan, it is a "contributory" plan. For New Jersey income tax purposes, you will use either the Three-Year Rule Method or the General Rule Method to determine the taxable part of any distribution you receive from a contributory plan other than an IRA. If you won't get all the money back within 3 years, choose general rule.

4. fill in the boxes under General Rule, continue

5. Select From a Qualified Plan

6. Continue through the program answering questions

When you go to the state, you will see Retirement Exclusion Summary. It will say certain retirement income on federal is NOT taxable by NJ.

@DAG3

[MiKill_11210]

Hi,

I have a different TSP related quandary.

If I contributed to TSP on money earned in MD but file my taxes as a resident of NJ, do I have to include those contributions in NJ income?

Thanks for any light you can shed.

Michael

[JohnsonCharlie]

Michael,

New Jersey is notorious for taxing anything that moves or breathes!!!  However, in your case I believe NJ can't tax the contribution portion of a TSP withdrawal because that contribution was made from Maryland earned income.  (Maryland probably took state income taxes from those contributions.)  

Now, New Jersey will be the first in line to collect state income taxes on your TSP withdrawal for the  growth portion.  So how do you know which part of your withdrawal is a contribution (NJ-tax free) and which portion is  growth (NJ-taxable) ???  That's where Turbo Tax will guide you through process.  Good luck!

[fanfare]

The General rule and the Three year rule apply to pensions.

A qualified retirement plan such as 401k or TSP is not a pension.