Does NJ Tax 401(k) Contributions and Withdrawals?

New Jersey does not tax traditional 401(k) contributions, but it fully taxes 401(k) withdrawals. Under state regulations, both your elective deferrals and your employer’s matching contributions to a 401(k) are excluded from your New Jersey gross income in the year they go in, matching the federal treatment. The trade-off arrives at retirement: because nothing was taxed on the way in, every dollar you withdraw is taxable pension income on your NJ-1040.

This makes the 401(k) an exception in New Jersey’s retirement tax framework. Contributions to most other retirement plans, including 403(b)s, 457s, and IRAs, are taxed in the year you make them.

Contributions Are Excluded From NJ Gross Income

New Jersey Administrative Code 18:35-2.5 allows employees to defer state income tax on contributions to IRC Section 401(k) plans. Both the employee’s elective deferrals and the employer’s matching or profit-sharing contributions receive that deferred treatment.¹ If you defer $10,000 from your paycheck into a traditional 401(k), that $10,000 is excluded from your New Jersey wages for the year, just as it is on your federal return.

This deferral has applied to contributions made on or after January 1, 1984. The New Jersey Division of Taxation confirms that 401(k) contributions made after that date “were not included as income when they were made,” provided they did not exceed the federal elective deferral limit.²

One trap to know: if your contributions exceed the federal elective deferral limit in any year, the excess is included in New Jersey gross income for that year.² This most commonly happens when you contribute to more than one employer’s plan in a single year and the combined total tops the annual cap.

Investment growth inside the plan is also tax-deferred. Capital gains, dividends, and interest earned inside the 401(k) are not reported on your annual NJ-1040. That internal activity only matters when you take a distribution.

2026 Federal Contribution Limits

New Jersey follows the federal elective deferral limits. For 2026, the IRS has set:

Standard employee limit: $24,500, up from $23,500 in 2025.
Catch-up for age 50 and over: an additional $8,000, for a total of $32,500.
Enhanced catch-up for ages 60 through 63: an additional $11,250 instead of the standard catch-up, for a total of $35,750. This higher limit was created by SECURE 2.0.³

Withdrawals Are Fully Taxable in New Jersey

Because New Jersey never taxed your contributions going in, it taxes everything coming out. The Division of Taxation states it plainly: “401(k) distributions, including contributions made on or after January 1, 1984, are fully taxable since the contributions were not taxed when made, and earnings are taxable.”⁴

There is no cost basis to recover and no exclusion ratio to calculate. Every dollar of a 401(k) distribution, whether it represents your deferrals, employer money, or investment earnings, counts as taxable pension income on the NJ-1040. Your plan will issue a federal Form 1099-R showing the gross distribution; you report that amount as pension income on your New Jersey return.

This is the mirror image of how New Jersey handles 403(b)s, 457s, and IRAs, where contributions are taxed up front but a portion of each later distribution comes back tax-free. With a 401(k), the paperwork is simpler at retirement, but the state tax bill is larger because the full withdrawal is exposed.

The Pension Exclusion Can Wipe Out the Tax

New Jersey offers a pension exclusion that can significantly reduce, or eliminate, state tax on 401(k) withdrawals once you reach retirement age. You qualify if you (or your spouse, on a joint return) were 62 or older or disabled at the end of the tax year, and your total income for the year was $150,000 or less.⁵

The maximum exclusion depends on your income and filing status:

Total income of $100,000 or less: exclude up to $100,000 (married filing jointly), $75,000 (single or head of household), or $50,000 (married filing separately) of taxable pension, annuity, and IRA income.
Total income of $100,001 to $125,000: the exclusion drops to a percentage of your taxable pension income: 50% for joint filers, 37.5% for single or head of household, 25% for married filing separately.
Total income of $125,001 to $150,000: 25% for joint filers, 18.75% for single or head of household, 12.5% for married filing separately.
Total income above $150,000: no exclusion.⁵

A married couple filing jointly with $90,000 in total income that includes $60,000 in 401(k) distributions could exclude the entire $60,000 from New Jersey taxable income. For moderate-sized withdrawals taken after 62, the exclusion often eliminates the state tax bite entirely.

A separate “Other Retirement Income” exclusion is available for residents 62 or older with total income of $150,000 or less and no more than $3,000 in earned income from wages or self-employment.⁵

Roth 401(k) Contributions Work Differently

Roth 401(k) contributions are made with after-tax dollars at both the federal and state level. The money is already included in your taxable wages when contributed, so you get no deduction or deferral on either return. Because you paid New Jersey tax on the way in, qualified Roth distributions come out without additional state tax.

Early Withdrawals

Taking money from a 401(k) before age 59½ generally triggers a 10% federal early withdrawal penalty on top of regular income tax. New Jersey taxes the distribution as pension income regardless of your age, and the state does not impose its own separate early withdrawal penalty.

Federal law carves out several exceptions to the 10% penalty, including distributions after separation from service at age 55 or later, distributions due to total disability or death, qualified domestic relations orders, and substantially equal periodic payments. SECURE 2.0 added exceptions for emergency personal expenses (up to $1,000 per year), domestic abuse victims (up to $10,000), and federally declared disaster recovery (up to $22,000).⁶ Even when a federal penalty exception applies, the distribution is still included in New Jersey gross income.

Required Minimum Distributions

You cannot leave money in a 401(k) indefinitely. Under SECURE 2.0, the age at which RMDs must begin depends on your birth year:

Born before July 1, 1949: RMDs began at age 70½.
Born July 1, 1949, through December 31, 1950: RMDs begin at age 72.
Born January 1, 1951, through December 31, 1959: RMDs begin at age 73.
Born January 1, 1960, or later: RMDs begin at age 75.

Missing an RMD triggers a federal excise tax of 25% on the shortfall, dropping to 10% if you correct it within two years.⁷ New Jersey does not impose a separate RMD penalty, but the distribution you take is fully taxable as pension income on your NJ-1040.

Rollovers Are Not Taxable

Moving 401(k) funds between qualified retirement accounts is not a taxable event for New Jersey, as long as the rollover qualifies under federal rules. A direct trustee-to-trustee transfer from one 401(k) to another, or from a 401(k) to a traditional IRA, avoids both federal withholding and state tax. The Division of Taxation confirms: “If you convert a 401(k) plan to an IRA — meaning the funds go from one financial institution to another, not to you — that is a rollover, which is not taxable.”⁴

Indirect rollovers, where the plan pays the money to you and you redeposit it into another qualified account, must be completed within 60 days. The distributing plan will withhold 20% for federal taxes, which you must replace from other funds if you want to roll over the full amount.⁸ Miss the 60-day deadline and the distribution becomes taxable, with New Jersey treating the full amount as pension income.

One Wrinkle When You Roll a 401(k) Into an IRA

The rollover itself is tax-free, but any future contributions you add to that IRA will be taxed by New Jersey in the year you make them, because IRA contributions do not receive the same deferral that 401(k) contributions enjoy.¹ Those taxed IRA contributions create a cost basis that you recover tax-free at withdrawal, while the rolled-over 401(k) money stays fully taxable upon distribution. If you plan to keep contributing to the same IRA, track the sources and amounts carefully. Mixing the two pools makes distribution accounting harder later.

How 401(k)s Compare to Other NJ Retirement Plans

The 401(k) deferral is the exception, not the rule. New Jersey taxes employee contributions to 403(b) plans, 457 plans, 414(h) plans, SEPs, Federal Thrift Savings Plans, and IRAs in the year the contributions are made.¹ Employer contributions to those plans still get deferred treatment, but your own payroll deductions are not.

Because you paid state tax on those contributions, you have a cost basis. When distributions begin, you only owe New Jersey tax on the portion that exceeds what you already paid tax on. For a 457 plan, the state’s retirement guide notes that “you only pay New Jersey tax on the amount that exceeds what you contributed to the plan.”⁴ For a traditional 401(k), no such offset exists on the post-1983 balance; the full distribution is taxable, and the pension exclusion is the primary way to reduce the bill.

1
Cornell Law School. New Jersey Admin Code 18:35-2.5 – Pensions and Annuities
2
New Jersey Treasury. Retirement Income GIT-1 and GIT-2
3
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
4
New Jersey Division of Taxation. New Jersey Income Tax Guide – Retiring in New Jersey
5
New Jersey Division of Taxation. NJ Income Tax – Retirement Income Exclusions
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
8
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions