Does New Jersey Tax 401k Distributions?

New Jersey taxes distributions from 401(k) plans, but the amount of tax you owe can be altered by the state’s specific regulations. Unlike federal rules, New Jersey’s tax treatment of your retirement funds creates a different calculation for what is considered taxable income. The state offers an income exclusion for eligible retirees, which can reduce or eliminate this tax.

Determining the Taxable Portion of Your Distribution

Since January 1, 1984, employee contributions to 401(k) plans have been treated as pre-tax for New Jersey income tax purposes, similar to their federal treatment. This means you have not paid New Jersey income tax on the amounts you personally contributed. Because your contributions were not previously taxed, your 401(k) distributions are generally fully taxable by the state.

Applying the New Jersey Pension Exclusion

After you determine the taxable portion of your 401(k) distribution, you may be able to reduce it using the New Jersey Pension Exclusion. This exclusion allows eligible taxpayers to subtract a portion of their retirement income, including 401(k) withdrawals, from their state taxable income. To qualify, you must be 62 or older, or be receiving Social Security disability benefits at any age.

Your ability to claim the exclusion is also tied to your total income, as New Jersey sets an income limit for this tax break. If your total income is $150,000 or less, you can use the exclusion. This income ceiling applies to most filing statuses, including Single, Head of Household, and Married Filing Jointly, and you cannot claim the exclusion if your income exceeds this threshold.

The maximum exclusion amount varies by filing status. For those who meet the age or disability and income requirements, the maximum exclusion is $100,000 for those Married Filing Jointly, $75,000 for those filing as Single or Head of Household, and $50,000 for those Married Filing Separately. These amounts directly reduce the taxable portion of your 401(k) distribution.

Special Distribution Scenarios

If you take a distribution before reaching age 59 ½, the withdrawn amount is subject to New Jersey income tax. While the IRS generally imposes a 10% early withdrawal penalty on such distributions, New Jersey does not have its own separate state-level penalty. The taxable portion of the early distribution is added to your other income for the year, unless the withdrawal is due to total and permanent disability, which could make you eligible for the Pension Exclusion.

A direct rollover of funds from a 401(k) plan to another qualified retirement account, like a traditional IRA, is not a taxable event in New Jersey. As long as the money is transferred directly from one retirement plan trustee to another, the state does not consider it a distribution.