New Jersey Confirms Roth IRA Rules

The New Jersey Division of Taxation has confirmed that New Jersey will follow federal tax deferral rules governing the taxation of Roth IRA conversions.

Specifically, New Jersey will follow the Federal Tax Increase Prevention and Reconciliation Act of 2005 provision regarding the federal income tax reporting of a distribution from a traditional IRA which the taxpayer converts to a Roth IRA in 2010.

If a taxpayer chooses for federal income tax purposes  to defer the recognition of taxable income resulting from a 2010 Roth IRA conversion to 2011 and 2012, the same deferral is required for New Jersey gross income tax purposes. However, if a taxpayer chooses to report the entire income resulting from a 2010 Roth IRA conversion in 2010, the taxpayer will also be required to report the income for New Jersey gross income tax purposes in 2010.

See Tax Notice:  2010 Conversion of a Traditional IRA to a Roth IRA

The conformity rule applies only to the timing of income recognition and not necessarily to the amount of income subject to tax.  For example, qualifying taxpayers can make contributions to a traditional IRA and claim a federal income tax deduction.  Subsequent withdrawals from the IRA are fully taxable.  New Jersey, however, does not allow deductions for IRA contributions.  Accordingly, subsequent withdrawals of amounts contributed to the IRA are not taxed by New Jeresey; only the portion of the withdrawal attributed to income earn by the IRA.

For a full explanation of the how New Jersey taxes IRA distribtuions see: Tax Topic Bulletin GIT-2, IRA Withdrawals