Tax Year Prior to 2020: Is an inherited Roth distribution tax-free in NJ?

[JohnB5677]

The New Jersey Income Tax treatment of Roth IRAs conforms to the federal treatment, and are not taxable, provided the distributions 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.

IRS Publication - IRA Distributions

[Reggieng]

Thank you for your answer and confirming my understanding and the results of my research.  However, it does not appear that the NJ tax program handles it that way.  Specifically, an inherited Roth IRA distribution in 2019 was entered using the Step-by-Step portion of the Federal TurboTax program, including going through all of the associated screens.  The result was that the Roth IRA Distribution (correctly) was not shown as income in the Federal 1040, BUT it was shown as income for taxes purposes on the NJ 1040 and was taxed for NJ purposes.  Yes, the Roth IRA was more than five years old and met the tax-free treatment requirements.  I even went through the step of deleting the subject 1099-R and reentering it, with the same results.  It appears that there may be an issue with how the NJ tax program treats the inherited Roth distribution.  

[JosephF8]

NJ will claim as taxable any Roth with Code J or T in Box 7. When you get to the page in the NJ return that tells you its taxable. Hit Continue. If it is the first year of withdrawal you get this pop out. Any Contributions you made to the Roth were already taxed.

[Reggieng]

I do not believe this input screen applies to a Roth IRA.  By definition, all contributions to a Roth are post-tax and an entry screen for post-tax contributions for Roths would be redundant. Please note that this is an Inherited Roth IRA, and this input screen, which is intended for post-tax contributions to non-Roth IRAs does not apply.   Additionally, if one were to try to use this screen as proposed, this is an inherited Roth IRA, and, thus, the post tax contributions would have been made by the deceased, not the recipient.  Therefore, the input for the recipient still would be zero and not resolve the issue.

[fanfare]

Once the Roth IRA becomes inherited, all the distributions are qualified distributions.

Don't file a NJ tax return that shows tax on that money.

[Reggieng]

Thanks, but I don't think that is the answer.  My understanding is that NJ receives 1099-R's for all distributions and matches the 1099-R's with the payee's NJ tax return.  Not reporting the Roth IRA Distribution on the return would be flagged and result in questions and, perhaps, an audit from NJ.

[VictorW9]

The tax treatment for inherited Roth IRA in New Jersey is similar to that of the federal treatment and are not taxable, provided they are qualified distributions.  

As long as the distribution is made:

1) 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.

2) The distribution is :

     a) Made on or after the date you reached age 591/2 

     b) Made because you are disabled

     c) Made to a beneficiary or to your estate after your death.

[fanfare]

Sorry I didn't try to propose an answer to the TurboTax problem because I don't know your 1099-R.

I meant to say that the distribution is not taxable, so your return Line 20a should be zero.

If it is not zero, it is showing taxable, don't file until you figure how to correct that,

OR

override it and mail in your state tax return.

Line 20b will show the amount and Line 20a is zero.

[fanfare]

Sometimes the custodian sends an incorrect 1099-R, in which case, your tax return will show the wrong result.

[Reggieng]

You are absolutely right.  In this particular case, the Federal taxes portion of TurboTax handled the 1099-R for this Roth IRA correctly (that is, the distribution did not result in additional taxes).  However, the NJ taxes portion seems considered it as a traditional IRA distribution and additional taxes were calculated.  In case I had miss-entered the 1099-R, I also deleted and reentered it several times, with the same incorrect results.  This leads me to believe that there is a glitch in the NJ Taxes portion of the program.

[fanfare]

What is(are) the distribution code(s) box 7 ?

Does it have an "X" in the "taxable amount not determined" box ?

Box 2a should be zero.

[Reggieng]

Yes, I confirm that it meets all of the requirements for a qualified Inherited Roth IRA distribution and I am aware that NJ follows the Federal rules and treatment for it.  Also, please note that TurboTax calculates the Federal tax for this distribution correctly as $0 (there is no change in the tax whether the distribution is entered or not.  As I said in an earlier post, I added and deleted the 1099-R for this distribution several times to look for changes in the calculated tax.).  However, the tax calculated in the NJ State program does show a difference when the distribution is added.  Again, it appears that there is a glitch in the software for the NJ State taxes.

[VictorW9]

As long as the child lives with you for at least half the year, the child is considered living with you for the whole year.

[Reggieng]

Now I am getting frustrated.  What are you talking about.  Your answer has NOTHING to do with my original question and the discussion link.