For your New Jersey retirement, you are allowed to take 100% tax free the first year by reducing your basis (contributions). After the first year, the taxable portion uses the same amount which represents return of your contributions. See Page 3 of GIT-2 -IRA Withdrawals- there is also a worksheet and examples.
In the first year a withdrawal is made, contributions means the total amount you contributed to the IRA from the time the account was opened through the end of the tax year in which the first withdrawal was made. After the first year, the formula for calculating the portion of a distribution that is taxable remains the same, but the base for each item changes to take into account the fact that both taxable and excludable (nontaxable) amounts have been withdrawn from the account.
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