NJ: Rorth IRA Withdrawal

[Marche24]

Hello!

Most websites I look up information on Roth IRA say that you can withdraw your contributions (not the gains) tax/penalty free, even if you are under age 59.5 and the account is been open for less than 5 years because you already paid taxes on that money. Reference: https://www.schwab.com/ira/roth-ira/withdrawal-rules

There are some websites that don't make a distinction and use only the term"qualified distribution" when referring to withdrawals and it get's confusing if a "qualified distribution" definition applies to withdrawal of contributions.

Looking up the definition on the IRS website they have the following

Source: https://www.irs.gov/publications/p590b#en_US_2019_publink[phone number removed]

What Are Qualified Distributions?

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

2. The payment or distribution is:

   1. Made on or after the date you reach age 59½,

   2. Made because you are disabled (defined earlier),

   3. Made to a beneficiary or to your estate after your death, or

   4. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

 So, which is it?

Last but not least, I live in New Jersey and was told that even if you withdraw only the contributions (assuming they are tax/penalty free) you have made, you still get taxed. Why? That money is tax-free and you would be getting double taxed

[macuser_22]

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@Marche24 wrote:

 So, which is it?

Last but not least, I live in New Jersey and was told that even if you withdraw only the contributions (assuming they are tax/penalty free) you have made, you still get taxed. Why? That money is tax-free and you would be getting double taxed

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It is both.   If "Qualified" then it makes not difference if you are just withdrawing your own contributions.  Any qualified distribution will always be tax and penalty free even if earnings are withdrawn.  Once qualified then there is no need to even track (or enter) your own contributions any longer.

If under age 59 1/2 or not qualified then you can withdraw your own prior contributions tax and penalty free but any earnings are both taxable and subject to penalty.

A qualified distribution will have a 1099-R box 7 code Q (or T if qualified except the payer does) not know if the 5-year rule has been met).    Non-qualified will have a code J in box 7.

Sorry I will have to leave the NJ question for someone else.    I know nothing about NJ tax law that can be different then Federal.

[fanfare]

bottom line : don't take money from a Roth until it becomes Qualified.

NJ will not tax your withdrawal.

A qualified distribution does not appear on your NJ Tax Return.