How the state of New Jersey and the federal government tax Individual Retirement Accounts can be confusing for many taxpayers.
Tax professionals strongly advise people to not only keep track of their personal contributions, but to also keep good records each year, as they receive a statement.
For NJ taxpayers, the only amount in your current IRA that would not be taxable, for New Jersey purposes, upon distribution would be the actual traditional contributions you have made, according to Steven Gallo, a certified public accountant and personal financial specialist with the U.S. Financial Services in Fairfield, N.J. This is in contrast with federal rules where the entire distribution is taxed.
Distributions from retirement plans such as 401(k) and 457 plans are treated differently. Since, tax advisors note, the contributions you made to your employer-provided 401(k) and 457 plans are not taxed by the state of New Jersey at the time of contribution, nor are employer contributions, distributions from these plans are taxable at the time of distribution.
Taxpayers should note that New Jersey allows for a pension exclusion. In 2018, that was $60,000 for couples filing jointly. It was $45,000 for single tax filers, as long as the total income was $100,000 or less.
“So, it is quite possible that, if you are just taking the Required Minimum Distribution, the amount you estimate to be taxable would be eligible for the pension exclusion and therefore tax-free anyway, “said Gallo.
Taxing of the Required Minimum Distribution can be difficult to understand. A taxpayer can still deduct the after-tax contribution when preparing his or her federal taxes and both the pre-tax and after-tax contributions, for New Jersey taxpayers.
The issue is further complicated when withdrawing from a Roth IRA. For a withdrawal to be tax-free for New Jersey purposes, it must be considered a qualified distribution. A qualified distribution is any distribution you make after the five-year period beginning with the first tax year in which a contribution was made to a ROTH IRA. In addition, it must be made after the individual reaches age 59 ½, with limited exceptions.
To learn more about distributions and other tax matters for New Jersey residents, taxpayers can check Bulletin GIT-2 – New Jersey Division of Taxation website or contact their tax advisor at Diamond & Associates CPAs.