Jump to content

Taxation of plan distribution after moving to another state


rblum50

Recommended Posts

          I have a 401(k) plan with a terminated participant who accrued all of her benefits in Florida and has maintained her account in the plan. She has since moved to Virginia and now wants to take distribution of her account balance. Here's the question: when she takes her distribution, her CPA thinks that she will have to pay Virginia State Income Tax on the monies she received from the plan. I don't believe that this is the case. Opinions?

Thanks,

Rick 

Link to comment
Share on other sites

If she is a Virginia resident when she receives the distributions, then she will pay Virginia state income tax on her distributions.

https://www.tax.virginia.gov/news/virginia-taxes-and-your-retirement

For those who are curious about other states, visit:

https://www.kiplinger.com/retirement/602202/taxes-in-retirement-how-all-50-states-tax-retirees

Link to comment
Share on other sites

38 minutes ago, Bird said:

I didn't follow the link but I think that New Jersey thinks that if you deferred income while a NJ resident, you are supposed to pay tax to NJ on the income no matter where it is received. That is widely - universally - ignored.

I do not think the above is correct. 

https://www.finra.org/investors/learn-to-invest/types-investments/retirement/managing-retirement-income/taxation-retirement-income

 

I quote:

Smart Tip: Taxes on Pension Income Vary by State
It’s a good idea to check the different state tax rules on pension income. Some states do not tax pension payments while others do—and that can influence people to consider moving when they retire. States can’t tax pension money you earned within their borders if you’ve moved your legal residence to another state. For instance, if you worked in Minnesota, but now live in Florida, which has no state income tax, you don’t owe any Minnesota income tax on the pension you receive from your former employer.

 

I think a number of high tax states tried to tax benefits earned in their state but after you moved and congress stopped it as it was very unpopular.  

 

Link to comment
Share on other sites

A Federal statute (4 U.S.C. § 114) restrains a State’s and political subdivisions’ income taxes on a nonresident’s retirement income.

In the 1980s and early 1990s, several States assessed State income taxes on people who no longer resided or worked in the State. How? ‘The State provided you an exclusion from income when you lived or worked here and made your before-tax § 401(k), § 403(b), or § 457(b) contributions to those tax-deferred retirement plans. The State gets income tax to the extent your retirement payout is attributable to the accumulation from the exclusion we provided you.’

Often, this resulted, whether legally or practically, in “double taxation” because the State in which a retiree resided imposed its tax on retirement income, often with no credit for the working-years State’s income tax.

Congress legislated a Federal supersedure, which applies to amounts received after December 31, 1995.

4 U.S.C. § 114 https://uscode.house.gov/view.xhtml?req=(title:4%20section:114%20edition:prelim)%20OR%20(granuleid:USC-prelim-title4-section114)&f=treesort&edition=prelim&num=0&jumpTo=true.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

The statute defines “retirement income”. That definition’s first eight subparagraphs refer to kinds of retirement plans, contracts, or accounts. Subparagraph (I) about nonqualified deferred compensation puts some restraint on which payments are treated as retirement income.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

3 hours ago, ESOP Guy said:

I think a number of high tax states tried to tax benefits earned in their state but after you moved and congress stopped it as it was very unpopular. 

Thanks for correcting me. At this point in my life, if it comes up in the next couple of weeks I might remember it, otherwise I will revert to my old belief. Sigh.

Ed Snyder

Link to comment
Share on other sites

I know NYS taxes (or used to) NY-source NQDC if it is paid to a non-resident over a period less than 10 years, the threshold for qualifying as "retirement" income to which Peter alluded. I'm not sure if that is still the case, but knowing NYS would be surprised if it no longer applies. If so, I think the payer has a withholding requirement, which creates the compliance mechanism.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

Link to comment
Share on other sites

Some recent news stories about Shohei Ohtani’s contract with the Los Angeles Dodgers remark on its deferred payments in 2034-2043. Those payments might be “retirement income” within 4 U.S.C. § 114(b)(1)(I)(i)(II). That might mean California cannot tax those payments if Ohtani then is no longer California’s resident.

Further opportunities might be available if Ohtani no longer is a US resident at a relevant time.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

3 hours ago, Peter Gulia said:

Some recent news stories about Shohei Ohtani’s contract with the Los Angeles Dodgers remark on its deferred payments in 2034-2043. Those payments might be “retirement income” within 4 U.S.C. § 114(b)(1)(I)(i)(II). That might mean California cannot tax those payments if Ohtani then is no longer California’s resident.

Further opportunities might be available if Ohtani no longer is a US resident at a relevant time.

Yes, the WSJ had a rather extended article on this and how the tax benefits could be a major reason for the structure.  It was an interesting read.  

Link to comment
Share on other sites

If you give me Ohtani's contract, I would be THRILLED AND DELIGHTED to pay any and all taxes that might be due. Overall taxes are whatever, so what if they are, say, 60%? If I "only" get 40% of my $700 million, I'm still getting $280 million. Of course, that would be a big cut from what I make in the TPA business...

I wish I had a tax problem like this - I think I could handle it.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...