Allows distributions from NJBEST account to Roth IRA as qualified withdrawals and excludes such distributions from gross income tax.

S3874

SENATE, No. 3874

STATE OF NEW JERSEY

222nd LEGISLATURE

�

INTRODUCED MARCH 12, 2026

Sponsored by:

Senator� ANTHONY M. BUCCO

District 25 (Morris and Passaic)

Senator� KRISTIN M. CORRADO

District 40 (Bergen, Essex 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, 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.