Why is New Jersey taxing my backdoor Roth IRA?

[trianta2]

In 2019, I contributed $6676 of after-tax income to my employer 401(k), and from those funds I received an additional $754 as tax-deferred growth. I rolled over the $6676 to my Roth IRA, and the $754 to my Trad IRA. My 401(k) provider issued a 1099-R which showed a gross distribution (box 1) of $7430 with $6676 worth of Roth contributions (box 5). So far so good.

Now onto my IRAs. In 2019, I contributed $5500 to my Trad IRA for the 2018 tax year, and immediately backdoor converted those funds to Roth. I then contributed $6000 to my Trad IRA for the 2019 tax year, and again backdoor converted to Roth. Months later, I received the $754 above in my Trad IRA, and again backdoor converted to Roth. My IRA provider issued a 1099-R which showed $12254 for both box 1 and box 2 (i.e. 5500 + 6000 + 754).

I believe I should only be taxed on $754, because those were tax-deferred dollars that were converted to Roth, and indeed that is what my Form 1040 box 4b shows.

Now onto the issue: when I file my New Jersey state taxes, Turbo Tax is saying that my total New Jersey taxable pensions is $7430.

On an earlier screen, titled "Roth Conversion for <NAME>", I had an option to specify that $11500 of the $12254 distribution was previously taxed by New Jersey (i.e. $12254 - $754 = $11500). When I dug into the New Jersey form "Pensions Wks-TP", it listed the after-tax $6676 I rolled over from my 401(k) as Federal Taxable.

So I believe the $7430 taxable pension comes from the $6676 and $754 amounts, but the error seems to be that the $6676 amount is getting included. The $6676 amount was a post-tax contribution by me, not my employer, to my 401(k) that I subsequently rolled over into my Roth IRA.

I'd appreciate any help on how to correct this.

[fanfare]

Maybe it doesn't need correcting.

NJ-1040  Worksheet C which is embodied in  the Pensions Wks, does not allow recovery of 401k contributions, only your already NJ-taxed IRA contributions made while a NJ Resident.

[trianta2]

Hi @fanfare, thanks for your reply. This is the first time I've heard the term "recovery of 401k contributions", could you please provide a reference?

I'm having a hard time accepting that the $6676 is correctly marked as taxable. That $6676 was already taxed by New Jersey, because it was an after-tax contribution to a 401k that was rolled over to a Roth IRA. If what you say is true, then shouldn't every Roth 401k rollover also be taxable? That doesn't sound right...

[fanfare]

Recovery of IRA contributions is the New Jersey term for prorated non-taxable part of an IRA distribution as a fraction of  your "unrecovered " contributions in prior years.

That's contributions to an IRA, not to a  401K.

Otherwise, distributions from tax-deferred accounts are NJ-taxable income for NJ residents.

[fanfare]

put another way, you can't do a "back-door" Roth IRA  conversion by way of a 401k, only an IRA  into which you have recently contributed those funds.

[trianta2]

Thank you for elaborating. I'm not sure that my situation falls under what you've described. The after-tax contribution of $6676 to my 401(k) was not a conversion, but instead a rollover. My form 1099-R box 5 shows $6676.

[fanfare]

Please identify exactly which part and line number in that pension wks is showing the 6676 amount

[trianta2]

It's Part E - Federal Pension Amount, line number 1.

I've noticed that the table on the first page (which lists columns A through H) might have errors. There's a column which says "Check if Roth Conversion" and the box is checked for the line with the $6676 amount. However this was a rollover from the after-tax portion of my 401(k), not a Roth conversion. Column B also lists $6676 for the Federal Taxable Amount, which isn't correct.

[fanfare · Accepted solution]

mark an X in the column labelled "Check if Non-taxable".

[trianta2]

This clears the $6676 amount in Part E. Now only $754 is shown as taxable, which is correct because that was tax-deferred growth that was subsequently converted to Roth. Thanks!