Tracking cost-basis on distributions from 403(b)
[size=120]In the great state of New Jersey, contributions to a 403(b) are taxed by the state in the year of contribution, thus establishing a cost-basis for state income tax purposes for distributions.
I have an old 403(b) and a current 403(b), and I’m planning to roll the old one to a traditional IRA. If in three years I retire and roll the current 403(b) into that same IRA, do I have two cost-basis schedules to track, or are they combined?
Said differently, is there any reason I may want to move my old 403(b) assets to my new 403(b), and at retirement move the lump sum into an IRA? Is that any different?
Thanks for any thoughts/ideas.[/size]
Permalink Submitted by Joseph Arsenault on Thu, 2010-06-17 04:58
I wish I could help you on this. My only experience was with a similar situation where a client paid state tax on contributions, I believe in PA, and then moved to Arizona and basically had to pay tax on the distribution of the same funds again. I think thats what happened, in any event at the time she was doubled taxed on the state side because of her move with seemingly recourse from the tax already paid. If the state rules differ from the federal rules your best off to see a local CPA or experienced practitioner in that specific state.
Permalink Submitted by Matthew Clement on Thu, 2010-06-17 05:02
Most states allow for the exclusion of tax when tax has already been paid, even if in another state. In this case, that’s not the issue at hand. The question is whether there are issues in combining two accounts where there is state tax basis on both. If the combination occurs in advance of any distributions, I believe there’s no issue. I was merely trying to confirm that.
Permalink Submitted by Joseph Arsenault on Thu, 2010-06-17 21:23
You asked for thoughts or ideas, thats what you got 😀 . But again, you would want to consult with someone more in tune with New Jersey state tax law to confirm that because it is state specific. What you mentioned about states allowing an exclusion for tax paid in other states usually does apply (basic apportionment laws) but in the case I mentioned there was no credit available (at least at the time). That was my applied thought. Sorry it did not help you out. My guess or thought would be that your basis would be tracked separate until you combine the accounts. Then you would have a combined basis once they are all in your TIRA. I just don’t know how that is done on the state level for NJ. Maybe someone else here knows? Good luck with your confirmation.
Permalink Submitted by Matthew Clement on Fri, 2010-06-18 04:40
Joe, I fully appreciate your contribution, and I’m hopeful that others may have insight as well. Currently I can find no information from the state of NJ as to whether distributions must be treated prorata or if they may be aggregated as I’m hoping they may.
Permalink Submitted by Alan Spross on Fri, 2010-06-18 18:41
If you go to the NJ state website and pull up the Individual Income Tax Instructions, there are worksheets that deal with basis assignment for both qualified plans and IRA distributions at the state level. I just took a cursory glance, so you should verify my preliminary impressions with a NJ tax pro.
Basis assignment appears to operate as follows:
1) IRA distributions – there is a worksheet that produces a pro rata calculation in much the same manner as the 8606 does for the federal return. Therefore, the higher basis amount for the state is recovered over the life of the IRA. Basis added to the IRA from qualified plan rollovers will be included in the calculation, so each time after tax contributions are rolled to the IRA, the amount of IRA basis for state purposes will increase.
2) Qualified plans have more choices including a 3 year option under which the basis can be recovered first in some cases. Each plan would be calculated alone but if 403b plans were combined, then there would be a consolidated basis for the new plan. When the 3 year option does not apply, a pro rata calculation is done for each plan including combined plans.
One result from consolidating plans is the averaging of basis. You would recover basis more quickly if you took distributions first from the plan with the higher amount of basis rather than combining them. If the % of basis is about the same, it should not matter at the state level, but could increase RMDs under the federal rules if only one of the plans has pre 87 accruals for which RMDs can be delayed until 75.
Again, these impressions should be verified.