If you’ve inherited — or expect to inherit — an IRA or 401(k) from a parent in New Jersey, the tax picture is more complicated than it used to be. The SECURE Act of 2019 (and its follow-up, SECURE 2.0, in 2022) fundamentally changed how inherited retirement accounts are taxed, and the IRS issued final regulations in 2024 that end years of uncertainty about how the rules actually work.
For NJ beneficiaries, the federal rules are only half the story. New Jersey has its own quirks — no state deduction for IRA contributions, a pension exclusion with cliff thresholds, and the NJ inheritance tax — that can either reduce your tax bill or blow it up depending on how things are handled.
Here’s what matters.
The 10-Year Rule: What Changed in 2019
Before the SECURE Act, non-spouse beneficiaries could “stretch” distributions from an inherited IRA over their own life expectancy. A 45-year-old who inherited an IRA from a parent could take small annual distributions for 30–40 years, keeping the tax hit low and letting the balance grow tax-deferred.
The SECURE Act ended that. For account owners who died on or after January 1, 2020, most non-spouse beneficiaries must empty the inherited IRA within 10 years of the original owner’s death. The entire balance has to come out by December 31 of the 10th year, and whatever comes out is taxable income to the beneficiary in the year of distribution.
The consequence: instead of spreading $400,000 of inherited IRA income across four decades, a beneficiary now has to pull it out over ten years or less — often landing in much higher tax brackets during their peak earning years.
Who Is Exempt: Eligible Designated Beneficiaries
Not every beneficiary is subject to the 10-year rule. The SECURE Act carved out an “eligible designated beneficiary” (EDB) category that can still use life-expectancy stretch distributions. EDBs include:
- Surviving spouses — with additional options, including rolling the inherited IRA into their own IRA and treating it as their own
- Minor children of the account owner — but only until they reach the age of majority (21 in most cases), at which point the 10-year clock starts
- Disabled or chronically ill individuals as defined by the IRS
- Beneficiaries not more than 10 years younger than the deceased — typically siblings or a life partner close in age
Adult children, grandchildren, nieces and nephews, friends, and most trusts fall outside these categories. They are subject to the 10-year rule.
Do You Have to Take Annual RMDs? The 2024 IRS Regulations Settled It
For years, there was confusion about whether beneficiaries subject to the 10-year rule had to take annual required minimum distributions (RMDs) during those 10 years — or whether they could wait and take everything in year 10. The IRS waived penalties for missed RMDs from 2021 through 2024 while it sorted out the rules.
The final regulations, effective September 17, 2024, resolved it. For non-spouse beneficiaries subject to the 10-year rule:
- If the original account owner died before their required beginning date (RBD) — meaning before age 73 in most current cases — no annual RMDs are required. The beneficiary just has to empty the account by year 10.
- If the original account owner died on or after their RBD — meaning they had already started taking RMDs — the beneficiary must take annual RMDs every year during the 10-year period and empty the account by year 10.
The penalty waiver ends with tax year 2025. Starting with the 2025 tax year, missed annual RMDs trigger a 25% excise tax on the shortfall (reduced from the prior 50% under SECURE 2.0). For a beneficiary who’s supposed to take a $20,000 RMD and doesn’t, that’s a $5,000 penalty on top of eventually having to take the distribution anyway.
How New Jersey Taxes Inherited IRA Distributions
The federal rules determine when money has to come out. New Jersey determines how much of it is taxable at the state level — and the NJ answer can be different from the federal answer.
Two NJ-specific rules matter most:
1. NJ Doesn’t Allow a Deduction for IRA Contributions
Unlike the federal tax code, New Jersey does not let residents deduct contributions to traditional IRAs from state income. The practical effect: the original IRA owner already paid NJ state tax on every dollar they contributed. Those contributions constitute “basis” in the IRA — an amount that should not be taxed again when withdrawn.
When an NJ beneficiary inherits the IRA and begins taking distributions, only the earnings portion is taxable for NJ purposes. The portion representing the decedent’s previously-taxed contributions comes out tax-free at the state level.
This is where most beneficiaries lose money: they don’t know the decedent’s basis, don’t request it from the IRA custodian, and end up paying full NJ tax on distributions that should have been partially tax-free. Getting the basis calculation right requires records of the decedent’s IRA contributions going back to the beginning — or a reasonable reconstruction if records are missing.
2. The NJ Inheritance Tax Interacts With the IRA Basis
New Jersey imposes an inheritance tax on transfers to certain classes of beneficiaries. Whether an inherited IRA triggers the tax depends on the beneficiary’s relationship to the decedent:
- Class A (spouses, parents, grandparents, children, grandchildren, stepchildren): exempt from NJ inheritance tax
- Class C (siblings, in-laws): taxed on inherited amounts above $25,000, at rates from 11–16%
- Class D (nieces, nephews, friends, unrelated beneficiaries): taxed from the first dollar, at rates from 15–16%
See our overview of New Jersey inheritance tax for the full class breakdown.
Here’s the important interaction: if you’re a Class C or Class D beneficiary and you paid NJ inheritance tax on the value of the inherited IRA, you’re entitled to step up your basis to the inheritance-taxed value. This prevents double taxation — being taxed once under the inheritance tax and again under the income tax when distributions are taken. Calculating this correctly requires coordinating the inheritance tax return with the beneficiary’s future NJ-1040 filings, and the number has to be documented at the time of the inheritance tax filing, not reconstructed years later.
The NJ Pension Exclusion and the 10-Year Rule Collision
New Jersey offers a meaningful tax benefit for retirees — the pension exclusion — that can exclude up to $100,000 of pension, annuity, and IRA withdrawal income for married couples filing jointly, or $75,000 for singles. The exclusion is available to taxpayers 62 or older with total gross income under $150,000.
The catch: the exclusion is a hard cliff. Income of $100,000 gets 100% of the exclusion. Income between $100,001 and $125,000 gets 50%. $125,001 to $150,000 gets 25%. Over $150,000, the exclusion disappears entirely.
Now consider an NJ beneficiary who inherits a $500,000 IRA under the 10-year rule. If they pull roughly $50,000 out per year to spread the distribution, that $50,000 may be enough to push their total income past the $150,000 threshold — costing them the pension exclusion on their own retirement income.
This collision is common and expensive. A retired couple otherwise qualifying for the $100,000 exclusion could owe NJ tax on an additional $100,000 of their own pension income simply because of how the inherited IRA income is timed. Thoughtful distribution planning — front-loading distributions, back-loading them, or spreading around other income events — can meaningfully reduce the NJ tax hit.
Planning Strategies for NJ Beneficiaries
If you’ve inherited an IRA or know you will, the playbook depends on your situation. A few strategies worth discussing with an attorney or tax professional:
Get the basis documentation early. Request the decedent’s historical IRA contribution record from the custodian immediately. Missing records get harder to reconstruct every year. Without basis documentation, you’ll overpay NJ tax indefinitely.
Model the distribution timing. The “spread evenly over 10 years” default is often the wrong answer for NJ residents. Coordinating inherited IRA distributions with your own retirement income, Social Security, and Roth conversion strategy can keep you under the $150,000 NJ pension exclusion threshold in more years than not.
Watch the annual RMD requirement if it applies. If the decedent had already started RMDs, you can’t just wait until year 10 — you have to take something each year. The 25% excise tax on a missed RMD is a pure loss.
Consider disclaimer planning if appropriate. Within 9 months of the original owner’s death, a beneficiary can legally disclaim (refuse) an inherited IRA, which passes it to the contingent beneficiary. This is sometimes valuable for tax planning — a high-income child disclaiming in favor of a lower-income sibling or a grandchild, for example. Disclaimers are irrevocable once made, so they need careful legal analysis before execution.
Review beneficiary designations in your own estate plan. If you’re the IRA owner rather than the beneficiary, the 10-year rule shapes what your heirs will actually receive. In some cases, naming a trust as beneficiary — or using Roth conversions during your lifetime to pre-pay the tax — makes more sense than the default beneficiary structure you set up years ago. Coordinate IRA beneficiaries with your overall estate plan, not separately.
The Bottom Line for NJ Beneficiaries
The SECURE Act made inherited IRAs a bigger tax problem than they used to be, and New Jersey’s income tax rules add complications the federal rules don’t anticipate. The 10-year rule accelerates income recognition. Annual RMDs can now trigger penalties. NJ basis rules can save real money if handled correctly — and cost real money if ignored. The NJ pension exclusion cliff makes distribution timing consequential in ways that don’t matter at the federal level.
If you’re already a beneficiary, or you’re structuring your own IRA beneficiary designations with NJ family in mind, the plan should account for all of this together. For specific planning help, call 732-200-2877 or use the contact form to schedule a free consultation. For a broader look at NJ retirement tax planning, see our NJ retirement tax guide.