Receiving a pension in the state of New Jersey subjects you to all of the laws of the state. You must obey the tax laws when receiving retirement income regardless of the source of income. Even if you moved from New York to New Jersey or worked in New York and are receiving a pension from New York, your pension payments are still within the jurisdiction of New Jersey if you are a resident of the state.
New Jersey assesses income tax on retirement income in the state. When you retire, and your company sends you a pension payment, this pension income is subject to income tax. The tax is payable at ordinary income tax rates. You must include your pension income as well as any other retirement income you receive.
You pay income tax on the money you receive from New York. Even though your pension is from New York, New Jersey assesses income tax on retirement income from all states, local governments and from the federal government. You must file your tax return and pay tax on this income for the year that you earn it. Any unpaid pension amount or pension lump sum rolled over into an IRA is not taxable until you receive the income.
You may qualify for a pension exclusion. New Jersey allows a pension exclusion when you turn age 62. If your adjusted gross income falls below $100,000, then you won't owe income tax on your pension income. This allows you to retire at your normal retirement age for Social Security purposes and receive both your private or government pension, personal retirement savings and Social Security free of income tax provided you meet the income requirements.
You may avoid taxation of income at retirement if you draw money from a Roth IRA or a cash value life insurance policy. The Roth IRA allows you to remove money tax-free during retirement. But, the Roth IRA also allows you to remove your contributions from the plan first, thus avoiding state income tax. Likewise, cash value life insurance allows you to remove money from the policy through policy loans. These loans are income tax-free.