Author: Hazel Secco, CFP®, CDFA®
Estimated reading time: 15 minutes
Table of contents
- What is the NJ retirement income exclusion?
- What counts as total income?
- Why the $100,000 line matters more than the $150,000 line
- How much is the exclusion actually worth?
- Roth conversions and the exclusion: the New Jersey problem
- The lines that are different in New Jersey
- A worked example
- What to Do This Week
- Are you on track?
- Frequently Asked Questions
- Sources
New Jersey has a reputation as a hard place to retire, and for property taxes that reputation is earned. For retirement income, the picture is better than most people expect, with one condition: you have to manage your income to the state’s lines, and the lines are not where the federal ones are.
The NJ retirement income exclusion lets a single filer who is 62 or older take up to $75,000 of pension, annuity, and IRA withdrawals off her New Jersey return, and a married couple up to $100,000. New Jersey also does not tax Social Security at all. For a woman retiring in her early 60s with $2 million, mostly in a 401(k) or IRA, that combination is worth real money every year from 62 on, and it is lost the moment her total income crosses the wrong line.
I am a CFP® and a fee-only fiduciary based in Hoboken, and many of my clients are New Jersey residents with exactly this problem: the federal plan says one thing about how much to withdraw or convert each year, and the New Jersey plan says something different. This article explains the 2026 rules, what counts toward the income test, where the two steps are, and how to sequence withdrawals and Roth conversions around them.
What is the NJ retirement income exclusion?
The New Jersey retirement income exclusion is a set of three related exclusions in the state’s income tax law: the pension exclusion, the other retirement income exclusion (which covers any unclaimed pension exclusion), and the special exclusion for people who cannot collect Social Security. Almost everyone who uses it is using the first one, so that is where to start.
You qualify for the pension exclusion for a tax year if two things are true on December 31. You (or your spouse, if filing jointly) are 62 or older, or disabled as Social Security defines it, and your total income for the year is $150,000 or less. If you qualify, you exclude the lesser of your actual taxable pension, annuity, and IRA withdrawal income, or the maximum for your filing status and income level. Both tests are measured on the last day of the year, so the year you turn 62 counts in full even if your birthday is December 30.
The maximum depends on your total income, in two tiers.
| Total income for the year | Single, head of household, or qualifying widow(er) | Married filing jointly | Married filing separately |
|---|---|---|---|
| $100,000 or less | Up to $75,000 | Up to $100,000 | Up to $50,000 |
| $100,001 to $125,000 | 37.5% of taxable pension | 50% of taxable pension | 25% of taxable pension |
| $125,001 to $150,000 | 18.75% of taxable pension | 25% of taxable pension | 12.5% of taxable pension |
| $150,001 or more | None | None | None |
Those are the figures on the New Jersey Division of Taxation’s Retirement Income Exclusions page and in Tax Topic Bulletin GIT-1&2 (January 2026 edition). They have been in place since the 2021 tax year and are not indexed to inflation, so the lines do not move while your required withdrawals grow.
What counts as total income?
This is the part people get wrong, and getting it wrong is how a woman who thought she qualified ends up with no exclusion. Total income is line 27 of the NJ-1040: your New Jersey gross income before the exclusion is applied. It includes the full amount of your taxable pension and IRA withdrawals, plus wages, interest, dividends, capital gains, rental income, and business income. New Jersey has no lower rate for long-term capital gains, so a $40,000 gain counts as $40,000 of total income, the same as a $40,000 IRA withdrawal.
Three things do not count, and they are the three that make planning possible.
Social Security. New Jersey does not tax Social Security benefits, and they do not appear on the NJ-1040 at all. A $45,000 Social Security benefit is $45,000 of spending that uses none of your $100,000 of room.
Qualified Roth IRA withdrawals. A qualified distribution from a Roth IRA is not reported on the New Jersey return. Spending from a Roth does not move total income.
New Jersey municipal bond interest. Interest on New Jersey state and local bonds is exempt. Interest on other states’ municipal bonds is taxable in New Jersey and counts.
One more line that surprises people: a Roth conversion counts. If you convert $60,000 from a traditional IRA to a Roth, that $60,000 is taxable pension income on line 20a and it is part of total income for the $150,000 test, the same as if you had withdrawn it. This is where the New Jersey plan and the federal plan pull in different directions, and I come back to it below.
Why the $100,000 line matters more than the $150,000 line
Most writing about the NJ pension exclusion, including my own article on retiring in a high-tax state, focuses on the $150,000 cliff, where one dollar of extra income removes the entire exclusion. That cliff is real. But for a single woman with $2 million, the step at $100,000 is usually the more expensive one, because that is where the exclusion changes from a dollar amount to a percentage.
Take a single filer with $70,000 of IRA withdrawals and $30,000 of interest, dividends, and gains. Total income is $100,000. She excludes the full $70,000, because it is less than the $75,000 maximum. Her New Jersey taxable retirement income is zero.
Now give her one more dollar of dividends. Total income is $100,001, so she is in the second tier, and her exclusion is 37.5% of her taxable pension: $26,250. She just lost $43,750 of exclusion for one dollar of income. At New Jersey’s 5.525% and 6.37% rates, that is roughly $2,100 of state tax.
Compare that with the $150,000 cliff for the same woman. At $140,000 of total income with the same $70,000 of IRA withdrawals, her exclusion is 18.75% of $70,000, or $13,125, worth about $840 of tax. Crossing $150,000 costs her that $840. Real, but a fraction of what the first step cost her.
So for a single filer, the number to plan to is $100,000 of total income, not $150,000. For a married couple the same logic applies at $100,000, where a $100,000 exclusion becomes 50% of taxable pension.
How much is the exclusion actually worth?
It helps to know what you are protecting. New Jersey’s 2026 rate schedule for a single filer, from the Division of Taxation’s current rate schedules, is 1.4% on the first $20,000 of taxable income, 1.75% to $35,000, 3.5% to $40,000, 5.525% to $75,000, 6.37% to $500,000, 8.97% to $1 million, and 10.75% above that. Married filing jointly brackets are wider at the low end.
For a single filer with $100,000 of total income, all of it taxable, the state tax before exemptions and deductions is about $4,244. If $75,000 of that is excluded pension income, the tax on the remaining $25,000 is about $368. The exclusion is worth roughly $3,900 a year at its maximum for a single filer, and about $2,750 for a couple excluding $100,000, since the joint brackets are wider. Social Security does not count toward the limit, so the exclusion can last from 62 until required minimum distributions push you past $150,000, at 73 or 75. Over 10 of those years, that is roughly $27,000 to $39,000 of New Jersey tax, and the difference compounds if the money stays invested.
That is the prize. It is not life-changing on its own next to a $2 million portfolio, but it is large enough that the withdrawal order and the conversion schedule should be built with it in view, because the same decisions also determine your federal bracket, your Medicare premium two years later, and the size of the balance that produces required withdrawals. The Retirement Tax Playbook walks through that sequencing on the federal side.
Roth conversions and the exclusion: the New Jersey problem
Here is the conflict. On the federal side, a single woman who retires at 62 with no salary has room to convert a large amount each year at 22% or less. In 2026 the 22% bracket runs to $105,700 of taxable income for a single filer, which, after the $16,100 standard deduction, is about $121,800 of income. The federal plan says fill that bracket, because the alternative is paying 24% or 32% later when required minimum distributions and Social Security stack together.
The New Jersey plan says something different. Every dollar of conversion is total income. If she has $30,000 of investment income and converts $91,800 to reach the top of the federal 22% bracket, her New Jersey total income is $121,800. She is in the second tier, her exclusion is 37.5% of the conversion, and she pays New Jersey tax on the rest. If instead she caps the conversion at $70,000, total income is $100,000, she excludes the full $70,000, and the conversion is free of New Jersey tax entirely.
Run the numbers on the $21,800 of extra conversion between those two plans. New Jersey taxes the extra dollars, and the extra dollars also knock the exclusion on the first $70,000 from 100% down to 37.5%. Together that is about $2,980 of state tax on $21,800 of conversion, close to a 14% New Jersey rate on those marginal dollars. Add the 22% federal rate and she is paying around 36% to convert them. The required withdrawals she is trying to avoid would be taxed at 24% federally plus 6.37% in New Jersey with no exclusion, about 30%. On those dollars, the conversion loses.
The math points to two rules for New Jersey residents.
Before 62, convert to the federal line. The exclusion does not exist until the year you turn 62, so there is nothing to protect. The years from 59 1/2 to 61, or from your retirement date to 61, are the best Roth conversion years a New Jersey resident gets. I wrote about the federal side of that window in the Roth conversion window.
From 62 on, convert to $100,000 of total income, not to the federal bracket. Fill the space between your investment income and $100,000 with conversions or withdrawals, take the full exclusion, and fund the rest of your spending from the brokerage account or the Roth. If you are in the window where your Medicare premium is being set, the IRMAA threshold for 2026 is $109,000 of modified adjusted gross income for a single filer, so the two limits sit close together, and the IRMAA article covers that side.
The lines that are different in New Jersey
Four more rules change the arithmetic for New Jersey residents, and most national guides skip them.
IRA contributions were never deductible in New Jersey. The state taxed your traditional IRA contributions in the year you made them. When you withdraw, the part that represents those contributions comes out New Jersey tax-free, calculated on Worksheet C in the NJ-1040 instructions. If you have made direct IRA contributions over the years, find the records. A rollover from a 401(k) does not create this basis, because 401(k) contributions made on or after January 1, 1984, were excluded from New Jersey income when made.
403(b) contributions were taxed by New Jersey. If you spent your career at a hospital, a university, or a school district and contributed to a 403(b), New Jersey included those contributions in your income when you made them. In retirement, only the amount above your contributions is taxable in New Jersey. For a woman with 25 years of 403(b) contributions, that is a large excludable amount, and it is separate from the pension exclusion.
Unused exclusion can shelter other income, with a catch. If you are 62 or older, your total income is $150,000 or less, and you did not use the full pension exclusion, Worksheet D lets you apply the unused amount against interest, dividends, and other income. The catch is the earned income test: your wages and business income for the year have to be $3,000 or less. A woman who retires fully at 62 and lives on her brokerage account for a few years can use this. Keep a $20,000 consulting contract and that door closes.
The percentage tiers apply to your taxable pension line, not to the maximum. In the $100,001 to $150,000 range, the exclusion is a percentage of what you report on line 20a. There is no flat dollar floor. If your IRA withdrawals are small that year, the exclusion is small too.
A worked example
Here is a hypothetical composite built from situations I see regularly. Diane is 63, single, and retired last year from a pharmaceutical company in Morris County. She has $2.2 million: $1.5 million in a rollover IRA, $500,000 in a brokerage account, and $200,000 in a Roth IRA. She spends $115,000 a year and plans to claim Social Security at 70. Her brokerage account produces about $28,000 a year of dividends, interest, and realized gains.
The federal-only plan has her converting about $94,000 a year to the top of the 22% bracket and funding her spending from the brokerage account. Her New Jersey total income is $122,000. Her exclusion is 37.5% of $94,000, or $35,250, and she pays New Jersey tax on about $86,750 of income, roughly $3,400 a year.
The New Jersey-aware plan has her converting $72,000 a year. Total income is $100,000. She excludes the full $72,000, pays New Jersey tax on $28,000 of investment income, about $420, and funds her spending from the brokerage account and, in the later years, small Roth withdrawals that do not count. She converts $22,000 less each year, which means about $150,000 less moves to the Roth over seven years, and some of that will be taxed at 24% later. Against that, she saves about $3,000 a year of New Jersey tax and keeps her Medicare premium at the base rate, because her modified adjusted gross income stays under $109,000.
In Diane’s case the second plan wins, and it would have won by more if she had started converting at 60, before the exclusion existed, when she could have filled the federal bracket without a New Jersey cost. The right conversion amount for a New Jersey resident is the lower of the federal bracket line and the state’s $100,000 line, from the year you turn 62 until Social Security and required withdrawals push you past $150,000 for good.
What to Do This Week
Find line 27 on last year’s NJ-1040. That is your total income. If you are 62 or older and it is within $15,000 of $100,000 or $150,000, the plan for this year should decide which side of the line you land on.
Write down the year you turn 62. Before that year, conversions put no New Jersey exclusion at risk. From that year on, $100,000 of total income is the ceiling.
Pull your IRA contribution history. Direct contributions you made to a traditional IRA have New Jersey basis. If you cannot reconstruct them from statements, your past Form 5498s and NJ-1040s have the numbers.
If you had a 403(b), total your lifetime contributions. That total comes out of New Jersey income before the pension exclusion is even applied.
Check the earned income test. If you plan to consult or work part-time after 62, know that more than $3,000 of wages closes the door on using unused exclusion against your investment income.
Are you on track?
If you want to see where you actually stand, I built a free 3-minute Retirement Readiness Assessment that gives you a personalized score and a specific dollar gap estimate based on your numbers. Take the assessment here.
Hazel Secco, CFP®, CDFA®, is the founder of Align Financial Solutions, a fee-only fiduciary wealth management firm for high-net-worth women with complex financial lives: retirement, equity compensation, tax, and estate as one coordinated plan. Learn how Align approaches wealth management in New Jersey and retirement planning for women. Align is based in Hoboken, NJ, but we work with clients across the country virtually.
Already past the research phase? Book a free 15-minute Align Call: https://alignfinancialsolutions.com/book-a-call/. Whether we work together or not, you’ll walk away with clarity on your best next step.
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Frequently Asked Questions
Does New Jersey tax IRA withdrawals?
Yes, for residents. Withdrawals from a traditional IRA are taxable in New Jersey, except for the portion that represents contributions New Jersey already taxed, since the state never allowed a deduction for IRA contributions. From age 62, if your total income is $150,000 or less, the pension exclusion can remove up to $75,000 of those withdrawals (single) or $100,000 (married filing jointly) from your New Jersey return.
Does New Jersey tax Social Security?
No. Social Security benefits are not taxed by New Jersey and are not reported on the NJ-1040. They also do not count toward the total income test for the retirement income exclusion, which makes delaying Social Security and spending from other sources before 70 easier to plan around in New Jersey than in many states.
Does a Roth conversion count toward the $150,000 limit?
Yes. The taxable amount of a conversion from a traditional IRA to a Roth IRA is reported as pension income on line 20a of the NJ-1040 and is included in total income. A conversion large enough to push total income past $100,000 reduces the exclusion to a percentage, and one that pushes it past $150,000 removes the exclusion for the year.
What is the NJ pension exclusion for 2026?
For the 2026 tax year, the maximum pension exclusion is $75,000 for a single filer, head of household, or qualifying widow(er), $100,000 for married filing jointly, and $50,000 for married filing separately, if you are 62 or older and your total income is $100,000 or less. Between $100,001 and $150,000 the exclusion is a percentage of your taxable pension income. Above $150,000 there is no exclusion. The figures are not indexed to inflation.
Can I claim the exclusion if I am younger than 62?
Only if you are disabled as defined by Social Security guidelines on December 31 of the tax year. Otherwise the exclusion begins in the year you turn 62. For a married couple filing jointly, only one spouse needs to be 62, but only that spouse’s pension, annuity, or IRA income can be excluded.
Disclaimer: Advisory services are offered through Align Financial Solutions LLC (“AFS”), an Investment Advisor in the State of New Jersey. This article is for educational purposes only and does not constitute personalized tax, legal, investment, or financial planning advice. Rules and figures are current as of the 2026 tax year and subject to change. Tax calculations are approximate, exclude New Jersey exemptions, deductions, and credits, and are for illustration only. All client scenarios are hypothetical composites and do not represent any specific client outcome. Consult a qualified professional about your specific situation.
Sources
- New Jersey Division of Taxation, “Retirement Income Exclusions” (pension exclusion, other retirement income exclusion, special exclusion; updated September 28, 2026): https://www.nj.gov/treasury/taxation/njit7.shtml
- New Jersey Division of Taxation, Tax Topic Bulletin GIT-1&2, “Retirement Income” (January 2026): https://www.nj.gov/treasury/taxation/pdf/pubs/tgi-ee/git1&2.pdf
- New Jersey Division of Taxation, “NJ Income Tax Rates” and New Jersey Tax Rate Schedules (2020 and after): https://www.nj.gov/treasury/taxation/taxtables.shtml
- New Jersey Division of Taxation, “Retirement Income” (taxable and nontaxable retirement income for residents): https://www.nj.gov/treasury/taxation/njit6.shtml
- Internal Revenue Service, IR-2025-103, “IRS releases tax inflation adjustments for tax year 2026” (2026 standard deduction and tax brackets): https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill
- Social Security Administration, “Medicare Premiums: Rules for Higher-Income Beneficiaries” (2026 income-related adjustment thresholds): https://www.ssa.gov/benefits/medicare/medicare-premiums.html