It’s one week from tax day, so I thought a post on taxes would be appropriate.
Everyone should work with a competent accountant. But that’s less easy to do than one might think.
There is apparently a quirk in the New Jersey tax code that doesn’t allow SEP-IRA contributions to be reduce your taxable income at the state level. And judging from glances at some websites of accountants based in New Jersey, not all of them seem to know it.
Here is the NJ website discussing SEP-IRA (and other retirement accounts):
It seems SEP-IRA, 403(b), and 457 plan contributions do not reduce someone’s taxable income for state income tax purposes.
That means self-employed people may consider a self-administered 401(k) instead of a SEP-IRA for retirement savings.
However, it also seems that distributions from SEPs aren’t all taxable in retirement. Only those considered earnings are taxable as this passage from the NJ Division of Taxation shows:
So it may not be beneficial to invest in a SEP in New Jersey, but it may be beneficial to retire and withdraw from a SEP in New Jersey. The worst case would seem to be working and investing in a SEP in New Jersey, and then retiring to a state where all distributions from the SEP are taxable.
No reader should take this as tax advice, and should consult their accountant. But it also might be a good idea to quiz someone you might be hiring to be your accountant about how New Jersey treats SEP-IRAs to see if they’re aware of it. A random search of accountants’ websites seems to reveal that not all accountants who practice in the Garden Sate know this rule.
Do your own due diligence, and conduct your own research. And feel free to contact Mindful Advisory, LLC if you want some help in screening accountants and setting up an investing strategy mindful of taxes.
