24 Jan Is my RMD taxed? Do I need to pay estimated taxes?

Q. Starting in 2024 I am required to take Required Minimum Distributions (RMDs) from my retirement accounts. Is this money taxable by New Jersey? Can you tell me how to determine how much to have withheld from my distributions?
— Taxpayer

A. Like many questions about taxes, the answer?

It depends.

It depends on your specific facts, including what kinds of retirement plans you have, said Neil Becourtney, a certified public accountant and tax director with Smolin, Lupin & Co. in Red Bank.

If your distribution comes from an employer profit sharing plan or a 401(k) plan, then it would be fully taxable, he said.

If your distribution comes from a traditional IRA, a SEP, a Keogh plan or a Sec. 403(b) plan, then you did not get any tax benefit from the contributions made to these plans and thus only the earnings portion of your distributions would be taxable, he said.

Qualified distributions from a Roth IRA would be fully nontaxable for state purposes, he said.

But you also need to take into account the state’s pension exclusion.

“Since you indicate that you are required to take RMDs, you are beyond age 62 thus potentially eligible to claim a pension exclusion,” he said. “If your total gross income including taxable retirement plan distributions does not exceed $150,000 then you would be entitled to a pension exclusion.”

The maximum pension exclusion is $75,000 if single and $150,000 if a married joint filer, he said.

As far as withholding is concerned, it is optional for retirement plan distributions, Becourtney said.

“In order to avoid an underpayment of estimated tax penalty you must pay the lesser of 80% of your current year tax or 100% of your prior year tax through a combination of withholding and estimated tax payments,” he said. “Knowledge of your entire tax situation would be needed to provide guidance as to whether New Jersey withholding is desired.”

You could conceivably be overpaid without any taxes being withheld from your RMDs or you could be facing a sizable balance due, Becourtney said.

You may want to meet with a tax preparer who can take a look at your entire tax situation to help you decide the best way to proceed.

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This story was originally published in January 2024.

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