Author Topic: Oops. Opened a tIRA in a state that taxes tIRA contributions (NJ). Now what?  (Read 2649 times)

xenon5

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Hey all,

I live in New Jersey and opened a vanguard traditional IRA in the past month to max out 2014 contributions.  I've contributed $3300 so far.

Unfortunately, I only just learned that NJ doesn't align with the federal government on traditional IRAs.  Contributions don't reduce your taxable income.  HSAs also get no special treatment from NJ at all, taxed like a taxable investment account.

So what should I do?  My original plan was to stick with a traditional IRA until my income was too high and I'd switch to roth with the phase out.  Then in FIRE, I could set up a roth backdoor plan to keep taxes low.  But now it looks like I'd need to move to another state at FIRE time for this to work.  And if I did that, the tIRA contributions could potentially get taxed twice, first by NJ on input and again by my new state on output.  I also don't yet fully understand what this means for 401k to tIRA rollovers if I switch jobs.

Should I just leave the $3300 in the traditional IRA, stop contributing and call it a wash in favor of a roth?  Should I convert it?  Is there a chance that the tIRA benefit could still be worth it for the federal tax treatment?


Also, I've seen the suggestion that NJ IRAs and HSAs should prefer non-taxables bonds like TIPS or municipal from bogleheads (http://www.bogleheads.org/wiki/State_income_taxes).  But wouldn't it be best to put these things in normal taxable accounts since I'm still exempt from federal taxes on stocks in the IRA/HSA?  I also don't plan on having any bond allocation for several years, and when I do probably not much.


Edit:
I was able to find this publication from the NJ treasury:
(warning:pdf) http://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git2.pdf

stating the following: "You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. In most cases, your contributions to a traditional IRA were previously taxed and only the earnings are taxable to New Jersey in the year you elect to roll over the funds. "

So it sounds like I can.  But unfortunately I put the money in a mutual fund.  Will I get hit by vangaurd early selling fees by converting?
« Last Edit: February 07, 2015, 05:46:37 PM by xenon5 »

neil

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I live in California where we have to play this game with HSAs.  However, I don't really see a scenario where I wouldn't eventually spend HSA money as a qualified expense, so federal taxes are always saved.  So there isn't a lot of math to do.

It seems like you need to track cost basis and then taxes are exempt on the contributions:
http://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git2.pdf

It seems the biggest downside for this is if you don't retire in New Jersey.  Another state probably isn't going to care if you paid NJ state taxes on contributions.  Is that worth paying federal taxes now to avoid double taxation?  There's still a lot of tax savings at the federal level if you plan on keeping your expenses low at retirement age.

I'm glad the government makes this so easy.

xenon5

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I live in California where we have to play this game with HSAs.  However, I don't really see a scenario where I wouldn't eventually spend HSA money as a qualified expense, so federal taxes are always saved.  So there isn't a lot of math to do.

It seems like you need to track cost basis and then taxes are exempt on the contributions:
http://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git2.pdf

It seems the biggest downside for this is if you don't retire in New Jersey.  Another state probably isn't going to care if you paid NJ state taxes on contributions.  Is that worth paying federal taxes now to avoid double taxation?  There's still a lot of tax savings at the federal level if you plan on keeping your expenses low at retirement age.

I'm glad the government makes this so easy.

Either New Jersey, or a state with no or low income tax.  I feel like I would most likely retire in NJ, NY, OR (Portland), WA (Seattle), IL (Chicago), CO or PA (Philly).  It's too far out to know, but I think I'd want to move around often.  Washington is the only no income tax state on my list.  As a tech worker it honestly doesn't sound like a bad idea to consider the move while working.  But I like the NYC metro, we have the best subways/public transit.
« Last Edit: February 07, 2015, 06:50:04 PM by xenon5 »

Dodge

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Hey all,

I live in New Jersey and opened a vanguard traditional IRA in the past month to max out 2014 contributions.  I've contributed $3300 so far.

Unfortunately, I only just learned that NJ doesn't align with the federal government on traditional IRAs.  Contributions don't reduce your taxable income.  HSAs also get no special treatment from NJ at all, taxed like a taxable investment account.

So what should I do?  My original plan was to stick with a traditional IRA until my income was too high and I'd switch to roth with the phase out.  Then in FIRE, I could set up a roth backdoor plan to keep taxes low.  But now it looks like I'd need to move to another state at FIRE time for this to work.  And if I did that, the tIRA contributions could potentially get taxed twice, first by NJ on input and again by my new state on output.  I also don't yet fully understand what this means for 401k to tIRA rollovers if I switch jobs.

Should I just leave the $3300 in the traditional IRA, stop contributing and call it a wash in favor of a roth?  Should I convert it?  Is there a chance that the tIRA benefit could still be worth it for the federal tax treatment?


Also, I've seen the suggestion that NJ IRAs and HSAs should prefer non-taxables bonds like TIPS or municipal from bogleheads (http://www.bogleheads.org/wiki/State_income_taxes).  But wouldn't it be best to put these things in normal taxable accounts since I'm still exempt from federal taxes on stocks in the IRA/HSA?  I also don't plan on having any bond allocation for several years, and when I do probably not much.


Edit:
I was able to find this publication from the NJ treasury:
(warning:pdf) http://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git2.pdf

stating the following: "You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. In most cases, your contributions to a traditional IRA were previously taxed and only the earnings are taxable to New Jersey in the year you elect to roll over the funds. "

So it sounds like I can.  But unfortunately I put the money in a mutual fund.  Will I get hit by vangaurd early selling fees by converting?

Assuming you're in the 6.37% tax bracket:



If New Jersey allowed this deduction, you would have saved $350.35 in NJ State taxes on your $5,500 deposit.  However, this is dwarfed by the probably $1,375 (25%) - $1,540 (28%) you'll be saving in Federal taxes.

Still looks like a good deal to me.