Will Roth IRA income stop us from getting the pension exclusion?

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Q. Does a lump sum or any distribution from a Roth IRA count as part of New Jersey total gross income? We are full-time New Jersey residents over age 62, filing jointly and earning more than $125,000 but less than $150,000. We are each considering Roth IRA withdrawals that would put us over $150,000. Will we still qualify for the pension exclusion?
— Still working

A. It’s a great question.

Paying attention to your income and what it means for taxes is important so you’re not in for any surprises, or for a bigger-than-anticipated tax bill.

If your withdrawal meets the definition of a “qualified distribution” from a Roth IRA, you do not have to include it in your New Jersey income in the year you receive it, said Vaibhav Talati, a senior tax manager with CohnReznick in Holmdel.

He said a “qualified distribution” means a payment distributed after a five-year waiting period beginning with the first tax year you made contributions to your Roth IRA.

These distributions are not included in New Jersey income because your contribution(s) to your Roth IRA were taxed by the state when they were made, he said.

“Therefore, qualified distributions from Roth IRAs will not cause any reduction in the pension exclusions otherwise available,” Talati said. “You will qualify for a 25% pension exclusion based on your joint filing status and gross income being between $125,000 and $150,000.”

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This story was originally published on Oct. 18, 2022.

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