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

[VictoriaD75]

@Reggieng You are correct that this would be considered a qualified distribution. Per the NJ Division of Taxation, A qualified distribution from a Roth IRA is excludable from income and should not be reported anywhere on the New Jersey tax return. 

Entering this in the Federal area should allow your state return to recognize this, however, it sounds like that is not the case. You may need to contact TurboTax Support for additional assistance. 

NJ Income Tax - Roth IRAs

What is the TurboTax phone number

[Steve-NJ]

I’m having this exact same problem with my 2021 tax filing for New Jersey. Did anyone figure out how to make TurboTax consider it non taxable for NJ?  My federal is fine. 

[GeorgeM777]

In connection with entering the Roth distribution in the Federal Section under Wages & Income, did you see the screen below, or a similar screen, in which you could designate the distribution as non-taxable for NJ.  The screenshot below was taken from our test return, and the distribution amount of $10,000 was not included in our NJ taxable income. 

In your follow-up post, let us know what TurboTax application you are using, e.g. TurboTax Deluxe, TurboTax Premier, and which version, e.g. online or cd/download.    

@Steve-NJ

[Steve-NJ]

Thanks for getting back to me so quickly George.  I am using the Premier on-line version on a PC.  I saw nothing like that at all.  I did get a question "where is your distribution from" and selected "none of the above", but when it gets to the NJ state form the explanation seems to imply that I selected "general" and need to select "none of the above" for TT to use the same federal (non-taxable) designation.  I've gone back and selected "none of the above" multiple times, deleted my state info to reload it, etc. and it never works.  I'm trying to get the broker to change the 1099-R box 7 to "Q", but not sure if they will/can.  It is qualified (she passed in 2012 and opened it about 7 years before that). I know I can file a paper form with the correct info but would rather not have to.

[MarilynG1]

Have you tried Deleting/Re-Entering the 1099-R in your Federal return to see if the NJ question pops up as shown by @GeorgeM777 above? 

There was a NJ Update today.

Since you are using TurboTax Online, you may need to close the program, clear Cache/Cookies to get rid of any info being 'stuck' and re-open TurboTax.

Click this link for info on How to Clear Cache and How to Clear Cookies. 

[Steve-NJ]

Thanks Marilyn.  I just cleared the cache/cookies, deleted/re-entered the 1099-R, and this time did have the chance to say that the entire distribution was not taxable in NJ.  There were also many more questions about total IRA values, taxed contributions, etc. that were not there before. I'm not sure how they relate to an inherited Roth yet - I need to look at in more detail.  In the end, is still says about 25% of it is taxable in NJ but I'll keep at it.

[Steve-NJ]

No matter what I try, TurboTax (on-line Premier PC version) keeps saying the RMD from my inherited Roth is taxable in NJ.  Federal is correct (0 tax due).  I enter 0 in box 2a, box 2b is checked and box 7 says T (I spoke to Fidelity and they say they do not determine if an inherited Roth distribution is Qualified).  I've tried all the suggestions from above multiple times but the problem remains.  TT knows it is an inherited Roth from 2012 but it still thinks it is taxable in NJ.  There is no field to enter 0 tax due from NJ.   It seems that there is still a glitch in the 2021 on-line premier version for NJ that the original questioner asked about for their 2020 taxes. Does anyone have any other suggestions, or know if it would work properly if I purchased the boxed version (is the boxed version generally better for more complex issues)? 

[FangxiaL]

I just did an experiment. The $5000 showed up on Form 1040, but $0 was taxable for federal tax purposes as it is supposed to be. 

But on the NJ return, the $5k is not even showing up as taxable income at all. 

My question to you is, how did you confirm that the Roth distribution was taxed on your NJ return?

By NJ tax law, the Roth is not taxable as long as it meets the requirements for federal purposes.

@Steve-NJ

[Steve-NJ]

Good question.  It's clear that it is being taxed in NJ because the TurboTax Retirement Exclusion Summary lists the amount being taxed by NJ in a table (96% of the distribution for some reason), and if I delete that 1099-R then my NJ refund increases by the amount of the NJ tax on my inherited Roth distribution.  It all seems to key off the Distribution code "T" in box 7, with no way to correct for that (unlike the Federal form).

[GeorgeM777]

Yes, you are correct in that a Code T in box 7 will be deemed as a non-qualified distribution.  However, if there is a Code T in box 7 of the 1099-R, and the distribution was made after the five-year taxable period, it will be considered a qualified distribution and not taxable in NJ. 

In a previous post you mentioned that the firm will not determine for you whether the Roth distribution was qualified or not; however, you indicated that such distribution was in fact qualified.  Given these facts, enter Code Q in Box 7 on the relevant page in the federal section of TurboTax.  In our test return, which was prepared using TurboTax online, our Code Q entry for Box 7 resulted in no federal tax for the inherited Roth IRA and no NJ tax for the inherited Roth IRA. 

As you enter the inherited Roth IRA information in the federal section, you may see the page "Review your 1099-info."  Click Continue to proceed through the remainder of the application.  When we opened the state section, and began to complete our test NJ return, we did see the page below which indicated that our Roth IRA was not taxable income in NJ.  As a reminder, keep all of your records that support your position that the inherited Roth IRA was a qualified distribution.

@Steve-NJ

[Steve-NJ]

Thank you George! Very clear explanation that resolved the problem.  All is good now since I can easily show that it was indeed a qualified distribution.

[ValueFan]

Vanguard will mark box 7 as Q if they have a 5498 on file > 5 years old. I am moving all my Roths to Vanguard for this purpose.

[captron]

I had the same problem this tax year (2022).  Turbo Tax online Fed form 1040 properly excluded the ROTH qualified distribution from income. However, the  NJ-1040 included it.

I also changed the coding to a Q as suggested by GeorgeM777 but that is not a proper solution. Should not have to fudge the 1099-R.

TurboTax should explicitly ask if is is a qualified distribution and it should exclude the amount from the NJ-1040. 

If you read the instructions for IRS Form 1099-R you will see that the custodian is instructed to code as T only if they cannot determine if the five year holding period has been met. (Table 1)

https://www.irs.gov/instructions/i1099r#en_US_2023_publink100021668

"Use Code T for a distribution from a Roth IRA if you do not know if the 5-year holding period has been met"

Additionaly, the NJ Div Tax website instructs NOT to include qualified ROTH distributions anywhere on the return.  "A qualified distribution from a Roth IRA is excludable from income and should not be reported anywhere on the New Jersey tax return."  https://www.nj.gov/treasury/taxation//rothira.shtml

In this case, it is up to the taxpayer to determine if it is qualified. Turbo Tax should explicitly give users the ability to stipulate qualified or not.