Citing concerns about inflation and other economic hardships that could keep residents from saving enough for retirement, New Jersey lawmakers are considering expanding a popular tax benefit that seeks to encourage such savings.

Bipartisan legislation that cleared a key Assembly committee last week would make more New Jersey residents eligible for a state income-tax benefit currently offered only to those who contribute to a 401(k).

The same measure — which has already cleared the Senate — would also put New Jersey more in line with federal tax law, which provides tax benefits to those making contributions to a wider range of retirement savings plans.

To be sure, the legislation calling for the state policy change, even if enacted soon, wouldn’t go into effect in time for this year’s April filing deadline.

However, bill sponsors argue it could eventually generate significant savings for many residents at a time when concerns about affordability and taxes are running high in New Jersey.

“Workers won’t have to choose between paying for the bills today or saving for their futures,” said Assemblyman Ned Thomson (R-Monmouth).

Pandemic’s toll on savings

Concerns about the adequacy of retirement savings among U.S. residents have grown in recent decades as more and more private-sector employers have ceased to offer a defined-benefit pension in favor of defined-contribution plans like 401(k)s that use investment accounts to grow savings over time.

In more recent years, high annual inflation triggered by the COVID-19 pandemic has only added to the financial challenges faced by many residents who are trying to build a nest egg, including those in New Jersey, where costs related to housing and other necessities often run higher than in other parts of the country.

Moreover, a survey conducted last year by the Allianz life insurance company indicated more than 50% of respondents had reduced retirement savings contributions or stopped them altogether in response to financial pressure caused by inflation. More than 40% of respondents also said they had been forced to dip into their retirement savings due to inflation.

‘We’re not only looking at the future of the New Jersey worker, but the health of the state as well.’ — Assemblyman Ned Thomson (R-Monmouth)

As part of other efforts to bolster retirement savings among New Jersey residents, Gov. Phil Murphy’s administration announced earlier this year that a former federal benefits official has been hired to rejuvenate New Jersey’s long-stalled push to provide a new retirement savings option for private-sector workers.

Under the legislation that cleared the Assembly Financial Institutions and Insurance Committee last week, the state’s income-tax exclusion for 401(k) contributions would also be expanded to encourage more robust retirement savings, as well as to bring state tax law in line with how the federal government treats contributions to retirement plans.

That means, if enacted, the state tax benefit would begin to be offered to those making contributions to 401(a) pensions, 403(b) plans, 408 IRAs, 457 deferred compensation plans, and federal Thrift Savings Funds, according to the bill.

Strong backing for the measure

Several state business organizations are backing the effort to widen the tax benefit for retirement savings, including the New Jersey Chamber of Commerce and NJBIA (the New Jersey Business & Industry Association).

The measure has also enjoyed strong backing from the state’s nonprofit sector, which cites a tight labor market created by the pandemic among the reasons to expand the tax benefit.

Unlike for-profit companies, which can offer their workers 401(k) benefits that qualify for the state income-tax exclusion, the employees of nonprofits are typically enrolled in 403(b) plans, thus making their contributions ineligible for a state-level tax benefit under current law.

The change would go into effect ‘on or after the first day of January following enactment of the bill.’

While speaking about the legislation during the recent committee hearing, Assemblyman Roy Freiman (D-Somerset) said the current lack of parity between the state and federal tax laws in this area “just doesn’t make sense.”

“We want more and more people to put money away for retirement,” said Freiman, who is a primary sponsor of the legislation.

Reduce net taxable income

In addition to lining up state and federal tax law, the proposed policy change could also generate a combined more than $200 million in savings for eligible taxpayers in the first year by reducing their net taxable incomes, according to fiscal estimates prepared by the nonpartisan Office of Legislative Services.

Thomson touted those savings and suggested New Jersey could improve its overall economic climate by providing the retirement savings option to a broader group of residents.

“We’re not only looking at the future of the New Jersey worker, but the health of the state as well,” said Thomson, who is also a primary sponsor.

“We need to continue to strive to make New Jersey an attractive place for businesses and employees to stay in and move to,” he said.

Last year, the legislation was cleared by the Senate in a 38-0 vote. But it had been stalled in the Assembly for nearly a year, prior to last week’s 11-0 vote in committee.

Under the current version of the legislation, which needs to clear the full Assembly and get Murphy’s signature to become law, the proposed policy change would go into effect “on or after the first day of January following enactment of the bill.”