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tigerkonig
Level 1

Moving States - How that changes the 401k contribution deduction?

I currently live in Texas, which has 0% state income tax. For work, I need to move to California this summer. I want to max out my 401k to fully capture my employer match.

Since California taxes me at 10% marginal, would waiting to contribute to the 401k until later this year when I'm physically in California save me money on state income tax when I file? Or does it not matter if the contribution was made while I'm in Texas or California?

I'd imagine if it does matter, it could save me 10% on 19.5k which is almost 2k and makes waiting a few months potentially worth it.

3 Replies
Opus 17
Level 15

Moving States - How that changes the 401k contribution deduction?

@dmertz ??

 

I think it will make a difference, as long as it does not affect your match.  If you get the same match whether you contribute $1625 per month for the whole year, or $3250 for the last 6 months, then it probably will make a difference.  Assuming you can plan ahead and afford to live on less money or save your money earlier in the year.

 

It sounds like you will be working for the same employer, so you will get a single W-2.  Your box 1 wages will be reduced by the amount of your contributions, but that won't be sensitive to where you lived when the contributions were made.  However, your state wages in box 16 should reflect where you were living when you were paid, and that should reflect the reduced wages after the 401k contribution.  

 

Then, when you tell Turbotax you were a part-year TX resident and a part-year CA resident, Turbotax will ask you to manually allocate your wages to the two states.  It may use the reported wages from the W-2 as a starting point, but I think you can alter that if the W-2 is wrong (for example, if the company takes a few pay cycles to update your withholding).  You can allocate the wages in such a way as to show the effect of the 401(k) only on your CA wages, if that's when you made the contributions. 

 

Just in case there is some weird rule that 401(k) contributions must be evenly allocated, I asked an expert to double-check me.  

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
MinhT1
Expert Alumni

Moving States - How that changes the 401k contribution deduction?

It does matter.

 

If you contribute to your 401(k) while working in California, then your taxable wages sourced in CA will decrease by the amount of the contribution, and you would save on CA tax.

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tigerkonig
Level 1

Moving States - How that changes the 401k contribution deduction?

Thank you!

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