Alert: Important Pending Legislation in New Jersey
Pending legislation in New Jersey could level the playing field on retirement contributions. Unlike the Federal Government and most other States, New Jersey does not allow participants to make pre-tax contributions to 403(b) and 457 plans as well as Health Savings Accounts (HSA). (401(k) contributions are currently allowed on a pre-tax basis). The proposed legislation would level the playing field for all retirement plans, correcting a disparity that impacts mostly teachers and not-for-profit employees.
Federal Treatment of Retirement Plan Contributions
Contributions to traditional 401(k) 403(b) and 457 plans are made on a pre-tax basis up to the annual contribution limits. In 2019, the contribution limit is $19,000 with an additional $6,000 catch up for participants age 50 and over). If your employer matches your contributions, the matching amounts are also made on a pre-tax basis and are subject to applicable taxes when you withdraw from the plan.
Health Savings Account contributions are treated the same as retirement plan contributions: pre-tax contributions up to the annual contribution limit of $3,500 for singles and $7,000 for families.
State Treatment of Retirement Plan Contributions
State tax rules don’t always follow federal guidelines, creating disparities.
Only seven states have no personal income tax: Wyoming, Washington, Texas, South Dakota, Nevada, Florida, Alaska. In these states, deductibility of retirement plan contributions does not apply.
For those states with income tax, the vast majority do not require 401(k) contributions to be included in state wages (ie. pre-tax contributions)! Note that there are some notable exceptions.
Pennsylvania does not allow pre-tax contributions to any retirement plan.
In New Jersey, oddly enough, the type of plan determines the “pre-taxability”, as follows:
401k plans are the most common retirement savings vehicles used by for-profit public and private companies. Since January 1, 1984, employee contributions to 401(k) Plans are excluded from taxable wages when earned.
A 403(b) is primarily used by non-profit organizations, religious groups, school districts, and governmental organizations. The law grants these organizations exemption from certain administrative processes that apply to 401k plans. Participants in a 403(b) plan will have plan contributions included in New Jersey income. At retirement, taxes are assessed on amounts received in excess of those contributions (ie. Interest, dividends, investment earnings, etc). In other words, teachers and other non-profit employees in NJ pay taxes on their 403(b) contributions, while for-profit employees are not subject to NJ tax on contributions to equivalent 401(k) programs.
Public schools, colleges, universities, charities, state governments, local governments and other tax-exempt entities may offer 457 plans. Participants in an eligible deferred compensation plan of a state or local government or tax-exempt organization (Section 457), will have contributions included in New Jersey income. At retirement, taxes are assessed on amounts received in excess of those contributions (ie. Interest, dividends, investment earnings, etc).
So doesn’t New Jersey’s treatment of 403(b) and 457 Plans effectively make them ROTH Plans? Answer: No!
With traditional 401(k), 403(b) or 457(b) plans, contributions are generally deducted from the participant’s salary and taxable income (i.e. on a pre-tax basis) and are taxed when withdrawn. If a Roth option is available under the plan, participants can use a Roth program option where contributions are made on an after-tax basis, and all distributions are tax-free if all other withdrawal requirements are met.
The way contributions to 403(b) and 457 plans work in New Jersey is that contributions are included in income in the year they are contributed. At withdrawal the proportion of the account balance representing contributions that were previously included in taxable income is now excluded from taxation. However, the portion of the withdrawal attributable to interest, dividends and gains is taxable. Therefore, it is extremely important for 403(b) and 457 plans, (and 401(k) participants prior to 1984) to keep track of contributions, to ensure that taxes on withdrawals are properly calculated.
What about Health Savings Accounts?
One item notably excluded from the proposed legislation is pre-tax contributions to Health Savings Accounts (HSAs). New Jersey and California are the only two states that do not allow pre-tax deductions for HSAs.
Status of the Legislation
New Jersey Proposed Legislation Bill 4899 was introduced on January 17, 2019 and referred to the State Financial Institutions and Insurance Committee for comment. The Bill was sponsored by: Assemblyman ROY FREIMAN District 16 (Hunterdon, Mercer, Middlesex and Somerset) Assemblyman EDWARD H. THOMSON District 30 (Monmouth and Ocean) Assemblyman ANDREW ZWICKER District 16 (Hunterdon, Mercer, Middlesex and Somerset) Assemblyman ANTHONY M. BUCCO District 25 (Morris and Somerset). After review and proposed modifications by the State Financial Institutions and Insurance Committee, for the Bill become law, the Bill must pass both Houses by a majority vote and be approved by the Governor.
AEPG supports the proposed legislation that level the playing field so that New Jersey is competitive other states in this area. Plans that benefit predominately teachers and non-profit employees should be treated the same as 401(k) plans. In addition, there is also an opportunity for the Bill to be modified to allow pre-tax treatment for Health Savings accounts.
To contact your state legislative officials to express your support of the proposed bill and spread the word.
You may call or write to legislators at their district offices or write to them at:
c/o New Jersey Senate, State House
P.O. Box 099, Trenton, NJ 08625-0099 or
c/o New Jersey General Assembly, State House
P.O. Box 098, Trenton, NJ 08625-0098.
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. This material may contain certain forward-looking statements. These forward looking statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by American Economic Planning Group, Inc. (“AEPG”) will be profitable. Definitions of any indices listed herein are available upon request. Please remember to contact AEPG if there are any changes in your personal or financial situation or investment objectives so that we can review our previous recommendations and services, or if you wish to impose, add or modify any reasonable restrictions to our investment management services. This article is not a substitute for personalized advice from AEPG and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investment decisions should always be made based on the investors specific financial needs, objectives, goals, time horizon and risk tolerance. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of AEPG. Descriptions of AEPG’s process and strategies are based on general practice and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.