Connecticut-specific State Tax Question

[Tallman4123]

Beginning in 2023, Connecticut is phasing out state income tax on "distributions from IRAs." Taxpayers qualify for the exemption if their income is below certain thresholds. Here is a brief summary from ct.gov: "The FY 22-23 Budget Implementer Act phases out the income tax on certain taxpayers’ distributions from IRAs, other than Roth IRAs, over four years beginning with the 2023 tax year."

My question is: Does a 401(k) distribution qualify as an "IRA distribution?"

Most of my retirement assets are still in former employer 401(k) plans. Of course, I could always move these funds into rollover IRAs to qualify for the exemption if necessary but it just seems weird that I'd have to do that to qualify. I just can't find any language in or around the Act that clarifies...

 

[jim584672]

Page 680, it only states IRA, not 401k. You may need to roll it over. 401K search is empty.

https://www.cga.ct.gov/2021/ACT/PA/PDF/2021PA-00002-R00SB-01202SS1-PA.PDF

 

[Gumby]

I searched but could not find anything in other parts of the Connecticut General Statutes that might aid in answering the question. In any event, we're over the threshold for AGI, so no joy for us.

 

[Graybeard]

I searched but could not find anything in other parts of the Connecticut General Statutes that might aid in answering the question. In any event, we're over the threshold for AGI, so no joy for us.

Gumby what is the threshold?

I looked at the link and for an unmarried it looks like under $75k of federal AGI.

 

[Gumby]

Gumby what is the threshold?

I looked at the link and for an unmarried it looks like under $75k of federal AGI.

Yes, $75k federal AGI for single, $100k federal AGI for MFJ. Pension, IRA and social security taxation all have the same threshold.

 

[ExPatKiwi]

Beginning in 2023, Connecticut is phasing out state income tax on "distributions from IRAs." Taxpayers qualify for the exemption if their income is below certain thresholds. Here is a brief summary from ct.gov: "The FY 22-23 Budget Implementer Act phases out the income tax on certain taxpayers’ distributions from IRAs, other than Roth IRAs, over four years beginning with the 2023 tax year."

My question is: Does a 401(k) distribution qualify as an "IRA distribution?"

Most of my retirement assets are still in former employer 401(k) plans. Of course, I could always move these funds into rollover IRAs to qualify for the exemption if necessary but it just seems weird that I'd have to do that to qualify. I just can't find any language in or around the Act that clarifies...

401k distributions come under the pension exemption section of the tax code and full exemption now applies providing your federal AGI is under the $100k/$75k limits. The IRA exemption is being phased in over 4 years.

Look at line 48b instructions in the 1040 instructions.

 

[Tallman4123]

Thanks for the replies; I learned a couple things:
1. The $75k Single, $100k MJF are "cliff" amounts, which - like the former ACA income guidelines - seem very penal to me.
2. 401(k) distributions come under the Pension and Annuity section of the CT tax code. That possibility never entered my mind (thank you ExPatKiwi for the explanation and reference to the instructions)! This argues for NOT rolling over 401(k) monies into IRAs since 401(k)s are already currently 100% exempt from CT state tax if you meet the income requirements, while IRAs are being phased in over the next few years.
Thanks again.

 

[joesxm3]

You can roll 401k into ROTH and do conversion without paying state tax.

 

[Gumby]

You can roll 401k into ROTH and do conversion without paying state tax.

As I understand it, you are still subject to the $100k MFJ federal AGI threshold. But I could be wrong.

 

[joesxm3]

Still subject to the limit, but can't you do partial roll overs for the ROTH conversion. Wish I saw this thread last year before I rolled my 401K.

 

[Gumby]

I guess it depends on the terms of the 401k plan whether you can take a partial distribution or need to take the whole thing. If your plan allows partial distributions, that could be a good strategy to stay below the AGI limit.