Double-taxing by States for Roth IRA Distribution

[hnguyen01]

Hi everyone,

Thanks in advance for the help!

I rolled over $145,000 to a ROTH IRA in 2016, and paid the state income taxes at the time in CA of $5.9K. In 2023, I decided to withdraw this contribution in MA for pay for an investment property.

In the turbotax system and brokerage statement it shows $0K withheld from MA for this withdrawal, so MA wants to tax me again in 203 for taxes I've already paid to CA back in 2016.

Two questions: 1) How do I resolve this double tax issue in the desktop version and 2) Are withdrawals of ROTH IRA contributions tax free (since they've already been paid) at the state level?

Thank you!

[Cynthiad66]

If you are a part-year resident for 2023 in MA, you might be taxed on the Roth distribution again.  Please use the exhibit from Massachusetts DOR for determining taxable distributions.  To prevent double taxation, Massachusetts allows a tax deduction for IRA distributions up to the total amount of already-taxed contributions.

For additional information about that distribution see this link:  Massachusetts Roth Distribution for Non-Residents and Part-Year Residents see page 25 (If it applies to you)

Also, see if you meet Massachusetts Roth distribution guidelines below:

• Distributions from a Roth IRA account made to you are excluded from federal gross income. A distribution is excludable if the IRA is held for 5 years and it meets 1 of the following conditions:
  • You were at least 59 and a half years old when it was distributed
  • You are disabled
  • The distribution is made to a beneficiary or your estate on or after your date of death
  • The distribution is paying for a qualified first time homebuyer expense (up to $10,000)
    (If a distribution is made before the 5-year holding period expires, or doesn't meet 1 of the 4 above conditions, the distribution is not excluded from Massachusetts gross income. Any earnings on the contributions are included in federal and Massachusetts gross income instead.)

To see if you're taxed on your Roth IRA distributions:

• Residents - Complete the Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions.
• Part-year residents taxed on IRA distributions they received as a Massachusetts resident - Complete Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions.
• Nonresidents - You're not taxed on IRA distributions.

See this link for Non Government Pensions Treatment for Massachusetts

[hnguyen01]

Hi,

I was a full time resident of CA and paid those taxes in 2016. I am now a full time resident of MA in 2023z 

Is it fair to assume then that I will deduct the CA paid taxes from my MA section in 2023? So it just hasn’t updated because I haven’t gotten to the state section yet?

Thank you

[DaveF1006]

 I think we are talking about two different events here.

1. In 2016, I believed you paid taxes in California for an excess contribution in 2016 to your Roth account.
2. In 2023, you are paying a tax on a early withdrawal distribution in Massachusetts because one these two conditions are not true.

• 5 years have passed since January 1 of the year in which the first contribution (including rollovers) was made to your Roth account, and
• You are at least 59½ years old (or disabled or deceased)

More than likely,  you are younger than 59 1/2 and this may have caused this to be a taxable event. Excess contributions and early withdrawal distributions are mutually exclusive meaning these are two different events thus you cannot claim credit for the tax you paid in California in 2016. Please read this article written by the State of Massachusetts for further details.

[hnguyen01]

The taxes paid in CA were the result of a conversion from a traditional IRA to Roth IRA.

I did not have an excess contribution tax, it was part of a rollover from traditional IRA to Roth IRA.

[DaveF1006]

Yes. You had to pay taxes on the traditional IRA before conversion so this explains why you were taxed in 2016. Regardless though, the Roth conversion in 2016 is a separate event from your distribution in 2023.

Assuming this is a premature distribution for the reasons given in my previous post, these are still two separate events and is still taxable in 2023 without regard to the taxes paid in California in 2016.

[hnguyen01]

The distribution in 2023 was only from my contributions, not earnings. As a result I believe they are exempt from federal taxes. Is this not the case about state taxes?

[RobertB4444]

Massachusetts doesn't tax Roth IRA distributions as long as you have had the account for five years (which obviously you have) and meet at least one of the following conditions-

You're at least 59 and a half

You're disabled

You're dead and the money is being paid to a beneficiary

You're a first time homebuyer and you're using the money for that

If you meet one of those (and you're also clearly not dead) then it's not taxable.  Otherwise Michigan does tax the distribution.

Here's a good thread on this subject.

@hnguyen01