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California requires you to add back the contribution, however the state doesn't have an excess contribution penalty like the federal. Effectively, the law just turns the contribution into a nondeductible contribution.
You will need to keep track of this nondeductible contribution. When you withdraw from your IRA, the full amount will be taxable on the federal return but not for California. You will need to make an adjustment on your California return to reduce your income by the amount that considered nontaxable for that year.
Thanks Kesha! I want to make sure I understand your comments.
1. Does "add back the contribution" mean that the contribution is ALLOWED but if the contribution was deducted on my federal return then I must reduce my California deductions by the amount of the contribution (effectively treating it as non-deductible for California)?
2. If the contribution was declared NON-DEDUCTIBLE on my federal return (via Form 8606), then the contribution is still ALLOWED in California, and no California adjustment is needed because there was no federal deduction to "add back". Would you agree?
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