Bill Text: NJ A4739 | 2024-2025 | Regular Session | Introduced
Bill Title: Allows distributions from NJBEST account to Roth IRA as qualified withdrawals and excludes such distributions from gross income tax.
Spectrum: Partisan Bill (Republican 1-0)
Status: (Introduced) 2024-09-12 - Introduced, Referred to Assembly Higher Education Committee [A4739 Detail]
Download: New_Jersey-2024-A4739-Introduced.html
Sponsored by:
Assemblywoman AURA K. DUNN
District 25 (Morris and Passaic)
SYNOPSIS
Allows distributions from NJBEST account to Roth IRA as qualified withdrawals and excludes such distributions from gross income tax.
CURRENT VERSION OF TEXT
As introduced.
An Act concerning the NJBEST program, and amending N.J.S.18A:71B-36 and P.L.1997, c.237.
Be It Enacted by the Senate and General Assembly of the State of New Jersey:
1. N.J.S.18A:71B-36 is amended to read as follows:
18A:71B-36. Definitions.
As used in this article:
"Account" means an individual trust account or savings account established in accordance with this article;
"Authority" means the Higher Education Student Assistance Authority;
"Contributor" means the person or organization contributing to and maintaining an account and having the right to withdraw funds from the account before the account is disbursed to or for the benefit of the designated beneficiary;
"Designated beneficiary" means: a. the individual designated at the time the account is opened as the individual whose higher education expenses are expected to be paid from the account; b. the replacement beneficiary if the change in designated beneficiary would not result in a distribution that is included in federal gross income under section 529 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.529] 26 U.S.C. s.529; and c. in the case of an interest in the program purchased by a state or local government or an organization described in paragraph (3) of subsection (c) of section 501 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.501] 26 U.S.C. s.501 and exempt from taxation under subsection (a) of section 501 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.501] 26 U.S.C. s.501, as a part of a scholarship program operated by the government or organization, the individual receiving the interest as a scholarship;
"Higher education institution" means an eligible educational institution as defined in or for purposes of section 529 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.529] 26 U.S.C. s.529. Higher education institution shall include a proprietary institution if expenses for tuition at the institution would be considered qualified higher education expenses under section 529 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.529] 26 U.S.C. s.529, but only for degree granting programs licensed or approved by the Commission on Higher Education or for other proprietary institutions as determined by the authority;
"Investment Manager" means the Division of Investment in the Department of the Treasury or the private entities authorized to do business in this State that may be designated by the authority to invest the funds of the trust pursuant to the terms of this article;
"Member of the family" means a member of the family as defined in or for purposes of section 529 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.529] 26 U.S.C. s.529;
"Nonqualified withdrawal" means a withdrawal from an account other than: a. a qualified withdrawal; b. a withdrawal made as the result of the death or disability of the designated beneficiary of an account; c. a withdrawal made on account of a scholarship (or allowance or payment described in subparagraph (B) or (C) of paragraph (1) of subsection (d) of section 135 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.135] 26 U.S.C. s.135) received by the designated beneficiary, but only to the extent of the amount of that scholarship, allowance or payment; d. a rollover or change in designated beneficiary which would not result in a distribution includible in federal gross income under section 529 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.529] 26 U.S.C. s.529; or e. any other withdrawal if the failure of the program to impose a more than de minimis penalty on the withdrawal would cause the program not to be a qualified State tuition program under section 529 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.529] 26 U.S.C. s.529;
"Program" means the "New Jersey Better Educational Savings Trust (NJBEST) Program" established pursuant to this article;
"Qualified higher education expenses" means expenses described in paragraph (3) of subsection (e) of section 529 of the federal Internal Revenue Code of 1986, [26 U.S.C.s.529] 26 U.S.C. s.529 incurred in connection with the enrollment of a designated beneficiary at a higher education institution;
"Qualified withdrawal" means a withdrawal from an account to pay the qualified higher education expenses of the designated beneficiary of the account or a special rollover of funds from an account to a Roth IRA, as described in subparagraph (E) of paragraph(3) of subsection (c) of section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.529; but a withdrawal shall not be considered a qualified withdrawal if the failure of the program to impose a more than de minimis penalty on the withdrawal would cause the program not to qualify as a qualified State tuition program under section 529 of the federal Internal Revenue Code of 1986, [U.S.C.s.529] 26 U.S.C. s.529;
"Trust" means the "New Jersey Better Educational Savings Trust" established pursuant to N.J.S.18A:71B-37.
(cf: N.J.S.18A:71B-36)
2. Section 13 of P.L.1997, c.237 (C.54A:6-25) is amended to read as follows:
13. a. Gross income shall not include earnings on a Coverdell education savings account, a qualified tuition program account, or a qualified ABLE account until the earnings are distributed from the account, at which time the amount of the distribution attributable to earnings on the account and the amount of the distribution attributable to contributions allowed as a deduction pursuant to section 3 of P.L.2021, c.128 (C.54A:3-12) shall be includible in the gross income of the distributee except as provided in this section.
b. Gross income shall not include qualified distributions as defined in paragraph (3) of subsection c. of this section.
c. For purposes of this section:
(1) "Coverdell education savings account" means a Coverdell education savings account as defined pursuant to paragraph (1) of subsection (b) of section 530 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.530.
(2) "Qualified tuition program account" means an account established pursuant to the "New Jersey Better Educational Savings Trust (NJBEST) Program," (N.J.S.18A:71B-35 et seq.) or an account established pursuant to any qualified tuition program, as defined pursuant to subsection (b) of section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.529 or a tuition credit or certificate purchased pursuant to any such program.
(3) "Qualified distribution" means any of the following:
(a) a distribution from a qualified tuition program account that is used for qualified higher education expenses as defined pursuant to paragraph (3) of subsection (e) of section 529 or a distribution from a qualified ABLE account that is used for qualified disability expenses as defined pursuant to paragraph (5) of subsection (e) of section 529A of the federal Internal Revenue Code of 1986, 26 U.S.C. s.529 or 529A;
(b) a rollover from one account to another account as described in clause (i) of subparagraph (C) of paragraph (3) of subsection (c) of section 529, clause (i) of subparagraph (C) of paragraph (1) of subsection (c) of section 529A, or paragraph (5) of subsection (d) of section 530 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.529, 529A, or 530; or
(c) a change in designated beneficiaries of an account as described in clause (ii) of subparagraph (C) of paragraph (3) of subsection (c) of section 529, clause (ii) of subparagraph (C) of paragraph (1) of subsection (c) of section 529A, or paragraph (6) of subsection (d) of section 530 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.529, 529A, or 530; [and]
(d) any other transfer involving a qualified ABLE account which is a qualified distribution for the purposes of section 529A of the federal Internal Revenue Code, 26 U.S.C. s.529A; and
(e) a special rollover of funds from a qualified tuition program account to a Roth IRA, as described in subparagraph (E) of paragraph(3) of subsection (c) of section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.529.
(4) "Qualified ABLE account" means an account established pursuant to P.L.2015, c.185 (C.52:18A-250 et al.) or an account established pursuant to any qualified State ABLE Program established pursuant to section 529A of the federal Internal Revenue Code of 1986, 26 U.S.C. s.529A.
d. The portion of a distribution from a Coverdell education savings account, a qualified ABLE account, or a qualified tuition program account that is attributable to earnings and the amount of the distribution attributable to contributions allowed as a deduction pursuant to section 3 of P.L.2021, c.128 (C.54A:3-12) shall be determined in accordance with the principles of section 72 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.72, as applied for purposes of sections 529, 529A, and 530 of the federal Internal Revenue Code of 1986, 26 U.S.C. [ss.529] ss. 529, 529A, and 530.
(cf: P.L.2021, c.128, s.6)
3. This act shall take effect immediately and shall be retroactive to taxable years beginning on or after January 1, 2024.
STATEMENT
This bill allows distributions from a New Jersey Better Education Savings and Trust (NJBEST) account to a Roth IRA to be considered a "qualified withdrawal" for purposes of the NJBEST program and exempt from State income tax, consistent with a recent change in federal income tax law.
Under section 529 of the federal Internal Revenue Code, states are authorized to establish "qualified tuition programs." More commonly referred to as "529 plans," these programs provide tax-advantaged savings accounts to help assist individuals in saving for certain higher education expenses of a designated beneficiary. Typically, the designated beneficiary is a child of the individual who opens a 529 savings account, but another family member may be designated as well.
The State's 529 plans are offered as part of the NJBEST program, which is administered by the New Jersey Higher Education Student Assistance Authority (HESAA). The program offers a number of investment options to help contributions made to a program account grow over time. Provided that contributions to a NJBEST account are withdrawn to pay for a qualified higher education expense, any investment earnings that have accrued to the account will be exempt from State and federal taxes. Qualified higher education expenses include amounts spent for enrollment or attendance of the designated beneficiary at an institution of higher education such as tuition, fees, books, supplies, equipment, room and board, among other similar expenses.
Recently, federal legislation was enacted to amend section 529 of the federal Internal Revenue Code to allow a "special rollover" of funds from a 529 savings account into a Roth IRA beginning after December 31, 2023, without imposing tax liability related to the withdrawal of monies from the 529 savings account. These special rollovers may occur, subject to the following conditions:
(1) the 529 savings account is required to have been open for the designated beneficiary for a period of at least 15 years;
(2) the Roth IRA to receive the rollover funds is required to be established in the name of the designated beneficiary of the 529 savings account;
(3) the amounts to be rolled over originate from amounts deposited into the 529 savings account at least five years prior to the date of the rollover; and
(4) no more than $35,000 in total funds may be rolled over, subject to annual Roth IRA contribution limits.
The NJBEST statute defines a "qualified withdrawal" as "a withdrawal from an account to pay the qualified higher education expenses of the designated beneficiary of the account." The statute further defines a "qualified higher education expense" in accordance with the definition of such expenses contained in Section 529 of the Internal Revenue Code. Since a rollover from a 529 savings account into a Roth IRA would not be considered a "qualified higher education expense," any withdrawal which effectuates such a rollover would not be considered a "qualified withdrawal" under the NJBEST statutes and subject the account earnings to State income tax.
The bill amends the definition of a "qualified withdrawal" under State law to include the special rollover of funds now allowed pursuant to federal law. The bill would further amend State law to exclude a special rollover funds from calculation of a taxpayer's gross income for purposes of determining income tax liability.
