Hello,
Just wanted to have some clarification regarding how NJ treats (non qualified) distributions from a Roth IRA that are only contributed/converted amounts (i.e. principal), and how it differs from Federal.
From 2011 thru 2014 (4 years in row), I contributed every year after-tax money ($5,000, $5,000, $5,000, $5,500 & $5,500 respectively for a total amount of $26,000) in a Traditional IRA and immediately converted into my Roth IRA ("backdoor loophole"). As of December 31, 2024, the balance of my Roth IRA was $50,000 + $26,000 withdrawal = $76,000 of Total Value.
In 2024, I needed some cash for an urgent matter and made several withdrawals for a total amount of $26,000. Because they were all contributions/principal (technically conversion but withdrawn each after 5-years), my federal tax form is correct in that I do NOT owe any tax at the federal level. All good.
I am more perplex on the NJ Tax Form because it seems NJ treats the taxation differently. Unlike Federal where any withdrawal are considered in a certain order (principal first non-taxed, then earnings taxable), my reading of the NJ Bulletin TB-44(R) along with GIT-2 seems to indicate that NJ does not operate a kind of FIFO methodology but rather a pro-rate basis, in that every non qualified distribution is taxable, with the taxable portion being the pro rate of the taxable earnings vs. the Total Value. Per GT-2:
Taxable Amount of the Distribution = Distribution x [ Earnings Portion of the Roth IRA ] / Total Roth IRA Value
Can someone confirm this to me?
In my case, the $26,000 distribution, even though they amounted to the total principal, are still taxable but only for the pro rated amount of $26,000 x $50,000 / $76,000 = $17,105. I am therefore not taxable of $8,895 of that $26,000 distribution.
Or should the entire $26,000 not taxable at all under NJ Tax Law just like Federal?
Thanks for any reply!!!!
Link:
https://www.nj.gov/treasury/taxation/pdf/pubs/tgi-ee/git2.pdf#page1
