08 Apr How are distributions from inherited IRAs taxed?

Q. Are distributions from any inherited retirement account fully taxable as income when they are distributed? Does it matter if it came from an IRA or a 401(k)?
— Beneficiary

A. The tax status of an inherited IRA is determined by the original IRA tax status.

You can learn this from the custodian of the IRA.

In all likelihood, the inherited IRA is subject to federal income tax, said David Ritter, chair of the tax practice at Brach Eichler in Roseland.

“Whether the full amount is subject to New Jersey income tax would depend on whether the contribution to the IRA was deducted for New Jersey income tax purposes,” Ritter said “Contributions to an IRA are not deductible for New Jersey purposes and therefore are not taxable upon withdrawal, but if the IRA came from a tax-free rollover from a pension plan, 401(k) plan or other plan for which the contributions were deducted for New Jersey purposes, then the withdrawal of the contributions is subject to income tax.”

Don’t forget that you may qualify for the pension exclusion, which could give you the opportunity to avoid tax on some of your income – as long as you earn less than $100,000.

Email your questions to .

This story was originally published on April 8, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.