First, please read "Retirement Income Understanding Income Tax" from the State of New Jersey.
Then, make sure that you have entered your state of residence as NJ before you enter the 1099-R.
Then, in the screens after you enter the 1099-R, because you live in NJ, there is a screen asking you information about this distribution. This is where TurboTax can determine if your 1099-R is tax exempt.
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