NJ Taxation of Roth IRA Distribution of Principal

[justin-and-vinh]

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 Because they were all contributions/principal (technically conversion but withdrawn each after 5-years), my federal tax form is correct in that I do NOT owe any tax at the federal level.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!!!!

Justvinh

link:

https://www.nj.gov/treasury/taxation/pdf/pubs/tgi-ee/git2.pdf#page1

[AmyC]

It depends on the distribution. Let's look at NJ IRA distributions:

NJ says a qualified distribution has been in your ROTH account for at least 5 years and meets these qualifications.

• On or after the date the individual reaches age 59½; or IRA Withdrawals Rev. 12/18 3 

• To a beneficiary (or the individual’s estate) after the individual’s death; or

 • Because the individual became disabled; or 

• As a qualified first-time home buyer distribution as defined by the Internal Revenue Code.

The question becomes, is your distribution qualified or not. 

Yes, qualified and not taxable.

 NJ IRA distributions: Roth IRAs. 

If you receive a qualified distribution from a Roth IRA, do not report any portion of the distribution on your return. Do not report the amount that represents your previously taxed contributions or the amount that represents earnings and amounts rolled over that were not previously taxed. 

No, not qualified.

 NJ IRA distributions: If you receive a nonqualified distribution from a Roth IRA, part of the withdrawal is taxable, and part is excludable. You must report the taxable portion of the withdrawal on Line 20a, Form NJ-1040 or Line 22, Column A, Form NJ-1040NR. Residents must also report the excludable portion on Line 20b, Form NJ-1040

NJ basically taxes all contributions to retirement accounts so they are not taxed when withdrawn. The federal allows people to set aside 401k, traditional IRAs, etc with reduced income and then taxes at withdrawal.

[fanfare]

NJ Worksheet C and the corresponding calculation in TurboTax does not apply to Roth IRAs.

Your NJ taxable amount is the same as the taxable amount included on Form 1040.

@AmyC 

cc:  @justin-and-vinh 

[justin-and-vinh]

Thank you for your reply. It is weird that TurboTax used the Worksheet C to split my Roth IRA distribution of principal (after tax IRA contribution converted into Roth IRA) into a taxable & non-taxable portions.

I have already filed and NJ accepted my return with an amount of tax owed. With the removal of the big chunk of distribution erroneously reported as taxable, I will have almost no tax amount owed.

Should I ask a tax expert at TurboTax to help me file an amended return?

Thanks again

[justin-and-vinh]

Thank you AmyC,

So based on your reply, was the distribution on my Roth IRA (consisting of only principal, i.e. after-tax money contributed into a traditional IRA and then converted into Roth IRA) considered taxable?

If you apply the strict bullet points, it is not a qualified distribution, because none of those bullet points address explicitly principal/contributions, only amounts withdrawn from the Roth IRA (regardless of whether principal, earnings or a mix of both).

If, as @fanfare  wrote, that the Worksheet C doesn't apply to Roth IRA, I will have to contact TirboTax because I already filed and my return was accepted by NJ and an agent will need to help me file an amended return.

Thanks again

[fanfare]

Step one:

Print a paper copy of the NJ return you filed. That is a baseline.

If you want further instruction how to amend NJ yourself, see here:

https://www.nj.gov/treasury/taxation/pdf/current/1040xi.pdf

you don't need turbotax, but you need a revised, corrected NJ tax return for comparison.

if you can figure what went wrong with TurboTax, you can correct it and e-File NJ-1040-X.

Probably you just answered some quesiton(s) incorrectly.

@justin-and-vinh