During the Tax Year 2024, my spouse made her first “partial distribution” from her former employer's 401(k) plan. This distribution amount was more than enough to satisfy her initial Required Minimum Distribution for Tax Year 2024. As a result, she received a Form 1099-R as follows. Box 1 (Gross distribution) shows an amount, and Box 2a (Taxable amount) shows an amount as determined by the plan administrator. Box 5 then shows a certain amount of employee contributions which represents after-tax contributions which are non-taxable. For purposes of doing our federal income tax filing, via Turbo Tax, I presume we enter these amounts as shown here. And since remaining after-tax contributions under the 401(k) plan are to be distributed on a pro-rata basis in future years, I expect that any partial distributions to be made will be reflected the same way on Form 1099-R in the future. As a result, for federal income tax purposes, I'll need to handle in the same same way on Turbo Tax. Am I correct on this?
At the same time, we live in NJ where we are required to do an income tax filing. In NJ, instead of using the “General Rule Method” to recover all her after-tax contributions, it looks like we are able to do so by using the “Three-Year Rule Method” instead. In looking at the booklet instructions on the Three-Year Rule Method, it is stated that you can use this method if you will recover all your (after-tax) contributions within 36 months from the date you receive your first payment from the plan and both you and your employer contributed to the plan” (which was the case). It is further stated that you do not report “pensions and annuity payments as income on line 20a until you have recovered all of your contributions. Instead, report these amounts on line 20b. Once you have recovered your contributions, the payments you receive are fully taxable and must be reported on line 20a.” In our case, this would apply to the partial distribution that was made in 2024 from my spouse's 401(k) plan. As it turned out, her very first partial distribution is actually more than the total amount of her after-tax contributions made under the plan. So, just in the first year alone, my wife is able to recover all her after-tax contributions. And for purposes of our NJ income tax filing for Tax year 2024, it looks like we would only need to report the difference between the gross amount of her partial distribution and the total amount of her after-tax contributions as income for Tax Year 2024 on line 20a. And for any partial distributions to be made in future years, such payments would be considered fully taxable when it comes to income tax filings in NJ (even though after-tax contributions will continue to be made on a pro-rata basis from the perspective of federal income tax filing). If this is correct, will Turbo Tax be able to reflect the same?
