Hoping some other Fed or military retirees can give me advice on this one: state taxes on the TSP for Hawaii. As far as I can tell, an old statute said no taxes on public retirement plans but a later statute amended that to say that doesn't apply to a bunch of plans including the Thrift Savings Plan.
Ok, so it's taxable. But then from what I can glean of the legalese following, it appears that only MY portion of the contributions are taxable and my annual statement says I contributed 76%. My tax preparer says if it's not on the 1099-R, then I have to pay tax on all of it. (Well, that's MY fault 'cause he originally told me I'm not taxed on TSP withdrawals and I corrected him.) 1099-R just lists the full amount and leaves the '9B Employee contribution' section blank.
Well, that’s one heck of an Internet rabbit hole.
@KimmK451, I’m going to go out on my unqualified limb to claim that it’s all subject to Hawaii state income tax, just like a traditional 401(k) is all subject to federal income tax.
It’s hard to prove a negative because nothing in the Hawaii references definitely mentions the TSP is either fully taxable or partially taxable, but the lack of exclusions implies that it’s fully taxable.
TL
R:
I’d consult with a tax CPA like Dick Oshima (or a referral) for an hourly rate. They might even answer your question for free.
http://www.oshimacpa.com/
The longer version:
Technically the TSP falls under sections 401(a) and 414(d) of the tax code, not 401(k), but for taxable income it’s treated as a 401(k). I don’t have the tax education to understand the difference but the latest TSP Fact Sheet explains the treatment:
https://www.tsp.gov/publications/tspfs05.pdf
Box 9b on the 1099-R is for total employee contributions or designated Roth contributions (Roth 401(k) contributions).
https://www.irs.gov/instructions/i1099r#en_US_2023_publink1000292017
Unless you contributed to a Roth TSP, this box would show your total employee contributions. However the federal government’s employer contributions and the growth are also tax-deferred, so they’re also subject to federal income tax. I think box 9b is blank on your 1099-R because everything else on your 1099-R is taxable at both federal & state levels.
That tax info release memo:
https://files.hawaii.gov/tax/legal/tir/1990_09/tir96-5.pdf
seems to imply that the employer’s matching contributions are exempt. But the section of the state income-tax law, 18-235-7-03(e), starts right off by talking about pension plans-- not 401(k)s. I added more comments on that part of the state law below.
Form N-11 instructions show some tax on deferred compensation plans.
https://files.hawaii.gov/tax/forms/2021/n11ins.pdf
Deferred Compensation Plans
“Distributions from a deferred compensation plan may be partly or fully taxable. A deferred compensation plan includes any plan in which the employee has a choice of whether to contribute money into the plan or take that amount in cash or property. Examples include 401(k) plans, salary reduction Simplified Employee Pension (SARSEP) plans, the Federal Thrift Savings Plan, and section 457 plans like the State of Hawaii Deferred Compensation Plan.”
Schedule J instructions help determine which parts might be exempt from tax.
https://files.hawaii.gov/tax/forms/2021/schj_i.pdf
“5. The state retirement system or any other public retirement system. Distributions from a public retirement system are not subject to Hawaii’s personal net income tax. However, distributions attributable to voluntary contributions made under an elective right by an employee of a government employer are subject to Hawaii personal income tax (see sections 18-235-7-01 through 18-235-7-03, Hawaii Administrative Rules (HAR)). If voluntary contributions were made, use this form to calculate the amount of the pension income subject to Hawaii personal income tax. If you are filing Form N-11, the amount reported as taxable pension for federal income tax purposes, but excluded from Hawaii personal income tax, should be included on Form N-11, line 13.”
Hawaii Administrative Rules (from the state tax codes) set up the deduction possibilities:
https://files.hawaii.gov/tax/legal/har/har_235.pdf
18-235-7-02 on page 34:
“Exclusion of benefits under public retirement systems. (a) The rules in this section shall be coordinated with provisions of the IRC. The IRC is operative in chapter 235, HRS, pursuant to sections 235-2.3 to 235-2.4, HRS, and other HRS provisions. To determine the taxability for state purposes of a distribution from a public retirement system, the taxpayer must first determine the federal income tax treatment for a distribution from such public retirement system. If a distribution from such public retirement system is not subject to federal income taxation, the distribution is similarly exempt from state income taxation under section 235-2.3 or 235-2.4, HRS.
If, however, the distribution is partially or totally subject to income taxation under section 235-2.3 or 235-2.4, HRS, the taxpayer may turn to section 235-7(a)(2), HRS, and this section to determine whether the taxpayer is able to claim a total or partial exemption for such taxable portion of the distribution, as the case may be.”
18-235-7-03 on page 35 is titled “Exclusion of pension income.” But TSP RMDs are not pension income. It also says:
“If a distribution from such plan is not subject to federal income taxation, the distribution is similarly
exempt from state income taxation under section 235-2.3 or 235-2.4, HRS. If, however, the distribution is partially or totally subject to income taxation under section 235-2.3 or 235-2.4, HRS, the taxpayer may turn to section 235-7(a)(3), HRS, and this section to determine whether the taxpayer is able to claim a total or partial exemption for such taxable portion of the distribution, as the case may be.
In determining whether the taxpayer is eligible to claim an exemption for a distribution under section 235-7(a)(3), HRS, and this section, section 235-7(a)(3) does not adopt the provisions in Subchapter D of the IRC (sections 401 through 424, IRC) which redefine certain amounts as employer contributions, and artificially redefine self-employed persons as employees, for purposes of those IRC sections.”
In other words, it seems to imply that TSP employer contributions aren’t considered separately as potentially excluded from state income tax.
Chapter 235, HRS, Income Tax Law doesn’t help:
https://files.hawaii.gov/tax/legal/hrs/hrs_235.pdf
Section 235-7 (bottom of page 21) doesn’t specifically exempt 401(k)s or the Thrift Savings Plan from state taxes, so I’m guessing it’s all presumed taxable.
There’s also section 234-2.4
:
“In administering sections 401 to 419A (with respect to deferred compensation) of the Internal Revenue Code, Public Law 93-406, section 1017(i), shall be operative for the purposes of this chapter.”
That also seems to imply your tax-deferred employee contributions, the employer’s matching contributions, and the growth are all taxable.
This blog post also flatly claims that TSP distributions are subject to Hawaii state tax:
https://stwserve.com/what-states-tax-social-security-tsp-federal/
My friend's first accountant told her no Hawaii taxes on the TSP, and her second accountant told her she's taxed on all withdrawals from the TSP. TSP help line guy told me 'no taxes on the TSP'.
If the TSP help line guy claims that the TSP is not taxed in Hawaii, he should have the guts to back it up with references to the Hawaii state tax code.
If he can’t show his work (and if his help-line scripts don’t cite the reference), then he gets no credit.
Pretty sure we're not the only ones who've had that problem. What is everyone else in Hawaii doing about taxes on their TSP withdrawals?
The government did not start contributing to military TSP accounts until the Blended Retirement System went into effect some years ago, well after Nords retired, so it wouldn't affect him.
Personally, my spouse and I never had matching government contributions.
But our daughter and son-in-law both have lots of these in their BRS TSPs, so we’ll get to that issue when they become Hawaii residents in 2024. Our daughter is finished with her military service, and I think she’s already in the process of converting her TSP accounts to a Roth IRA, but I’ll ask her about the details.
I remember researching Hawaii taxes in 2002 when I retired from active duty. Back then I decided that our entire traditional TSP RMDs (no govt matching contributions) would be subject to Hawaii state tax (in addition to federal tax) so we started doing Roth IRA conversions.
We finished rolling over our TSP accounts in 2015 and did our last Roth IRA conversion a few years later. These days we only have a couple of Roth IRAs and a taxable account, so we’re never doing RMDs.
But that doesn’t specifically answer your question about deducting employer matching contributions.
To boost my ignorance to even greater heights, we have a ton of state tax credits from energy improvements and an old angel investor incentive. We haven’t paid any state taxes since 2009. It’s quite possible that we’ll keep drawing down those state tax credits all the way to the 2050s.
Oh, and BTW, Nords lives just down the street from you.
Yep, we’re up in Mililani.
