Are 401k Withdrawals Taxable in New Jersey?
While 401k withdrawals are generally taxable in New Jersey, your final liability depends on specific state guidelines related to age and overall income.
New Jersey applies its own regulations to the taxation of retirement income, creating a different financial outcome than federal rules suggest. Understanding these state-level tax implications is part of managing 401(k) funds for any retiree in the state. This guide clarifies how New Jersey treats these withdrawals.
General Taxation of 401(k) Withdrawals
Any money you withdraw from a traditional 401(k) plan is considered part of your New Jersey Gross Income and is subject to the state’s income tax. This applies regardless of whether you receive the funds as periodic payments or a lump-sum distribution.
New Jersey has a progressive income tax system, so the taxable portion of your 401(k) withdrawal is added to your other income and taxed at your corresponding marginal rate. While the federal government imposes a 10% penalty on withdrawals made before age 59½, New Jersey does not have a state-level early withdrawal penalty. The withdrawn amount is still included in your taxable income regardless of age.
Since most 401(k) contributions are pre-tax, the full distribution amount, including contributions and investment earnings, is generally taxable upon withdrawal.
The New Jersey Pension Exclusion
New Jersey offers a Pension Exclusion that can reduce or eliminate state tax on 401(k) withdrawals. To qualify, you must be age 62 or older, or be classified as disabled by Social Security. Eligibility also requires your total income for the year to not exceed $150,000. This income limit is based on your federal adjusted gross income with some modifications.
The maximum exclusion amount depends on your filing status. For married couples filing jointly, the maximum is $100,000. For those filing as Single, Head of Household, or Qualifying Widow(er) with a total income of $100,000 or less, the maximum exclusion is $75,000. Married individuals filing separately can exclude up to $50,000.
The exclusion is reduced for taxpayers with total income between $100,001 and $150,000. When calculating your income for the $150,000 limit, you must include wages, interest, dividends, and the taxable portion of retirement distributions. Social Security benefits are not included in this calculation.
Calculating Your Taxable Withdrawal Amount
To determine the final taxable figure, first identify if any part of your 401(k) withdrawal is a return of previously taxed, after-tax contributions. New Jersey allows you to recover this “basis” tax-free. The state uses a Three-Year Rule for this calculation, which allows you to treat distributions as tax-free until your entire basis is recovered, after which all subsequent distributions are fully taxable.
After subtracting any recovered basis, you then apply the New Jersey Pension Exclusion if you are eligible. You subtract your allowable exclusion amount from the taxable portion of your retirement income to find the final amount subject to state tax.
For example, a single individual, age 65, has a total income of $80,000, including a $40,000 401(k) withdrawal with no after-tax basis. Because they are over 62 and their income is below the $100,000 threshold, they can exclude the entire $40,000 withdrawal, as it is less than the $75,000 maximum for a single filer.
Reporting Withdrawals on Your NJ Tax Return
Your plan administrator will send you Form 1099-R, which details your gross distribution amount. When completing your New Jersey income tax return, Form NJ-1040, you must report the gross amount of your 401(k) distribution on the line for pensions, annuities, and IRA withdrawals. This figure is taken from your Form 1099-R.
If you qualify for the Pension Exclusion, you will enter the calculated exclusion amount on a separate, designated line on the NJ-1040. The form’s instructions guide you through subtracting the exclusion from the total distribution to determine your taxable retirement income.