Q: Thank you for agreeing to respond to my New Jersey Thrift Savings Plan taxation question. New Jersey does not permit federal employees to contribute pretax dollars into TSP accounts. Its position is that TSP was not established under a Internal Revenue Code 401(k) plan. As this impacts many thousands of federal workers in the state, my question is: Presumably at retirement, New Jersey TSP participants will be taxed at the federal level for all TSP distributions, and at the state level for distributions minus contributions which NJ previously taxed (let’s hope so; that alone may be a recordkeeping nightmare). But what would the tax situation be for participants who moved to another state after retirement? Would another state recognize the post-tax contributions to TSP during a New Jersey residency, and permit state-tax-free distributions of that portion of distributions previously taxed by New Jersey? I’m mystified that the federal government never stepped in to convince New Jersey to treat TSP contributions the way other states do.
A: The answer will depend on the state in question. Logic would suggest that your basis should be portable, but logic doesn’t always prevail when it comes to state-by-state differences in tax law. You should consult a certified public accountant in the state in question for specific advice.