MA Schedule X Line 2 - Clarification on Withdrawals from Different IRAs

[BostonDoug]

I am completing 2024 Federal and MA Tax Return, and have a few points I'd like to check on with our experts here - thanks in advance 🙂

(1) I "believe" I understand the principle here for MA Schedule X, Line 2:

• Because MA does not allow deductions for IRA contributions, they don't tax withdrawals until the amount withdrawn exceeds those contributions that were previously taxed by MA.

(2) So we need to have a record of contributions made in the context of MA Income Tax filings, so those can be excluded from MA taxation when withdrawn. Those contributions should be found on prior tax statements.

(3) I think that for MA purposes, it doesn't matter if IRA contributions  were "pre-" or "post-" (federal) tax, because in either case MA did not allow a contribution deduction, and will tax them on withdrawal once the withdrawals exceed the total contributions while in MA.

SO.... presuming I got this much right, I'm left with a question of withdrawals from various IRAs. For example

• I have a Traditional IRA, some of which was contributed while filing MA taxes (mostly post, perhaps some pre-tax)
• I have an Inherited IRA, for which I've previously taken an RMD (required as decedent had not in that year), and in 2024 I took a distribution (on course to distribute all within my 10-year period).
• I have a small Roth IRA as well.

(4) Now the big question.  When I take withdrawals (as I did from the Inherited IRA this year), do I need to account from *which* IRA I am withdrawing, or are all these all lumped within one big pool?  Just to make an example, presume:

• I withdrew 100K from the Inherited IRA in 2024
• And all my prior year IRA contributions (within the MA context) was 50K
• Would I:
  • (a) treat the prior contributions on the Line 2 worksheet as "$0" because the IRA I withdrew from has no MA contributions? Meaning, I'm tracking these by IRA (is possible...).
  • (b) treat the prior contributions on Line 2 worksheet as $50K. Meaning, it's one big IRA pool...
• Seem's I'm advantaged to take path (b) as it reduces the taxable distribution in the current year - but it's not clear to me how to handle this.

Clarification *very* welcome here - Thank You.

[DianeW777]

You are correct as to the tax treatment in Massachusetts (MA) for your contributions to an IRA. Contributions made while living in MA are not deductible for state income tax purposes.  Also, any distributions are tax free on the MA state return up to the amount of your contributions.

If you withdrew 100K from the Inherited IRA in 2024, this would be taxable in full if it was an IRA that was not set up in MA and therefore never had any tax paid on the contributions. The key is whether the decedent was a MA resident who paid tax on all the contributions. 

• You would use (a) below if the decedent did not lived in MA while contributing:
  • (a) treat the prior contributions on the Line 2 worksheet as "$0" because the IRA I withdrew from has no MA contributions? Meaning, I'm tracking these by IRA (is possible...).
  • (b) treat the prior contributions on Line 2 worksheet as $50K. Meaning, it's one big IRA pool...

MA IRA Distributions Rules:

If you're a Massachusetts resident but also a beneficiary of a non-Massachusetts IRA, the entire IRA distribution is taxable since no Massachusetts tax was ever paid on the contributed income.

[BostonDoug]

Thank you @DianeW777  - this is helpful.

Although I'm left with the broader situation I was alluding to.

Forget the Inherited IRA for a second (I understand the guidance there), and consider I have a large Traditional IRA, mostly composed of rolled-over 401K.

SCENARIO for 2024

  - I've contributed $70K in MA to this Traditional IRA in prior years

  - I've rolled over $800K to this Traditional IRA in prior years

  - I withdraw $65K from this Traditional IRA in 2024

In that year, I would be able to exclude the the $65K from my taxable distribution for MA.  Great.

SCENARIO for 2025

  - I've contributed an additional $8K to this IRA in 2025

 -  I now withdraw $200K from this Traditional IRA in 2025

I am able to exclude the "remainder" ($70K-$65K) + new contribution of $8K = $13K from MA taxes, and this calc works (because Line D never reaches zero. So far so good.

SCENARIO for 2026

  - I've contribute an additional $8K to this IRA in 2026

  -I now withdraw $200K from this Traditional IRA in 2026

I "should" be able to exclude this new $8K contribution from MA taxes, but the calculation fails...  In fact, forever more, my new contributions are both taxed on earnings, and taxed on distribution because Line D grows and grows.... this feels quite wrong and not the intent.

In my CALC MODEL 2, I calculate Line D as I think intended... and do get the credit for new contributions so not double-taxed... I use "D (for 2025) = D + A - F (for 2024).  Effectively, it calculates how much untaxed  distributions were made, compares that to the contributions, and correct gives the deduction for that year...

Please see this Google Sheet (calculations are within), and image is shown here.

I don't see how to literally follow the schedule as written and not get double-taxed on this traditional IRA distributions in this case...

[DianeW777 · Accepted solution]

Yes. For Scenario 2024: Based on the information on the Massachusetts (MA) Tax Treatment for Non Government Pensions the following is how you treat IRA Distributions:

• Distributions from an IRA account made to you. For Massachusetts purposes however, distributions made are excluded from gross income if these distributions equal your Massachusetts previously taxed contributions.

Yes. For Scenario 2025: Same applies assuming you contribute to your IRA $8,000 for 2024 and 2025.

I agree with your calculations showing the tax free amount distributed for MA.  My only concern was that a proration would need to occur arriving at a percentage of total IRA balance after rollover of 401(k) to the traditional IRA (distribution/total value). However, MA does not seem to require that, rather you can reduce your MA income for amounts previously taxed until recovered before starting to tax earnings and amounts already deducted (amounts rolled in from the 401(k). 

• Tax Treatment for MA Purposes

@BostonDoug