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rjburr101 · Feb 25, 2010, 09:44 AM

I retired at age 56 ,two years ago, after 37 years of service and receive a private pension. I know my pension falls within the parameters stipulated by the State of Michigan and is not Taxable at the State level. However, in 2009 I also took a partial distribution from my 401k program, which currently remains in my former employers plan. The distribution code on the 1099R is listed as "2". I am using Turbotax to complete my return and the Michigan return is asking for the source of this retirement plan. The choices are:
Identify the source of the distribution by entering:

G - if the pension is from a government or public source (including military and railroad retirement)

P - if it is from a private source or an IRA

C - if it is a 2009 Roth conversion

N - if it is an other pension subject to Michigan tax

Which code would I use in this instance?
In addition, does it make financial sense to convert at least a portion of my 401k to an IRA and would the tax treatment differ in any way?

Thanks for your help.

ebaines · Feb 25, 2010, 10:37 AM

Distribution code 2 on the 1099-R means that it was an early distribution (you were under age 59-1/2), but an exception applies so there is no 10% early withdrawal penalty - in your case the exception is because you left the service of your employer in or after the year you turned 55.

I'll do some research, as I don't know the particulars about how MI treats 401(k) distributions, but in general - if MI excludes your 401(k) contributions from taxable income when you were employed, then most likely they do indeed tax distributions. I think most states do it that way. There are some that do it the other way around, so that contributions are included in taxable income while your employed, but distributions are excluded.

ebaines · Feb 25, 2010, 11:01 AM

After a bit of research - see the instructions for schedule 1, which is where you subtract income items that were included in your federal AGI but are excluded from MI tax: http://www.michigan.gov/documents/ta..._7.pdf#page=12 and also this site: Taxes - Pension and Retirement FAQs

It seems that you can subtract 401(k) distributions that are due to your employer's contributions and earnings on those contributions, and also the portion of your own contributons that are matched by the employer. But you can not subtract portions of the withdrawal that are due to your own contribution in excess of what the employer matches. Assuming that your 401(k) had employer matching contributions, your account statement should indicate what the source of funds for your distribution is.

I'm not sure how TurboTax wants you to enter this, but my guess is that you indicate the part than can be subtracted as source "P" and the part that can not be subtracted as source "N." If the help screens in the program aren't helpful, you may want to call the Turboax help line to get confirmation on this.

rjburr101 · Feb 25, 2010, 11:22 AM

ebaines,

Thanks very much for the quick reply and for the research. This helps a great deal.

ebaines · Feb 25, 2010, 11:48 AM

You're welcome!