401k Distributions and State Taxes

Submitted by Nicholas Scheidt on Mon, 2012-06-04 19:55

I currently live in NJ (with high state employment taxes), If I move to a state (FL for example), with no state employment taxes, then begin my 401k distributions will I pay 0% state taxes?
Where can I learn more about these tax rules?

Thanks,
Nicholas Scheidt

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Permalink Submitted by Alan Spross on Mon, 2012-06-04 20:10

I think you are referring to state income taxes, not employment taxes.

If you take distributions from retirement plans of any type in your state of permanent residence, you can only be taxed by that particular state. The state where you lived when you earned the money cannot pursue taxes on your distributions. This used to be referred to as “source taxes” and source taxes were eliminated by Congress back in 1996.

So if you move to FL and then take distributions after you establish permanent residence there (FL driver license, FL voter registration, etc) the only taxes you will pay on distributions is the federal income tax.

Permalink Submitted by Nicholas Scheidt on Wed, 2012-06-13 19:43

Alan,

Thank you for you informative and fast reply!
Does this rule also apply to converting a 401k to a IRA? That is, savings on the state tax, after residence (FL).

Thanks,
Nick

Permalink Submitted by Alan Spross on Wed, 2012-06-13 20:14

A direct rollover from a 401k to a traditional IRA is never currently taxable. Perhaps you are referring to a conversion to a Roth IRA or direct rollover from a 401k to a Roth IRA which are taxable.

These Roth rollovers or conversions are taxable at the state level based on your state of residence at the time of the conversion. You would therefore do any conversions only after establishing permanent residency in FL in such a way that your former state could not maintain that you still intended to return to that state. Such things as the sale of your former home, change of your drivers license and voting registration to FL, address showing on your tax returns, vehicle registrations, investment accounts etc.

Permalink Submitted by Nicholas Scheidt on Thu, 2012-06-14 19:04

Alan,

Correct, 401k to a Roth IRA conversion.

Once again thank you for your informative and quick reply.

Nick