23 Jan Why did New Jersey tax this Roth IRA withdrawal?

Q. Two years ago, I took $4,000 out of my Roth IRA in order to pay for home renovations. I had contributed around $20,000 over the course of four years at that point, and I thought I could take out that $4,000 penalty- and tax-free. I know I would have owed taxes on gains, but that wasn’t the case. I didn’t have to pay taxes to the federal government, but New Jersey taxed the money. What happened?
— Good grief

A. Let’s go over the rules.

A “qualified distribution” from a Roth IRA is not included in New Jersey income in the year received.

“Qualified” means a payment distributed after a five-year waiting period, which begins with the first tax year for which a contribution was made to an individual’s Roth IRA, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

Also, he said, the payment must have been made on or after the date the individual reaches age 59 1/2; or 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 homebuyer distribution as defined by the Internal Revenue Code.

“If a distribution was not made under one of the four circumstances above, or if it was made within that five-year period, it is nonqualified,” Becourtney said. “Distributions considered nonqualified for federal income tax purposes are also considered nonqualified for New Jersey purposes.”

Becourtney said a nonqualified Roth IRA distribution is partially taxable and partially excludible from income. To calculate the taxable portion, one can use a worksheet found in Tax Topic Bulletin GIT-2 from the New Jersey Division of Taxation website.

“So generally speaking, a Roth IRA distribution is exempt from federal income tax and it is also exempt from New Jersey income tax,” he said. “Based on your facts, you did not meet the five-year waiting period.”

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This story was originally published on Jan. 22, 2020.

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