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Pennsylvania taxes your 401K when you put the money into the fund while federal excludes the 401K contribution. Hence, when you converted your 401K to a traditional, this would have been a tax free event on your federal return because they are both pretax types of funds. However, when you converted the traditional to a Roth, you would have owed tax on your Federal return because tax had not been paid on the contributions. Since Pennsylvania already taxed the 401K when you made the contributions, you would owe no more tax to PA when you converted the now Traditional IRA to a Roth.
I copied and pasted this from the PA Income tax booklet found at http://www.revenue.state.pa.us/portal/server.pt/community/personal_income_tax/14692/2010/666236
Retirement, Pensions, and Deferred Compensation
Pennsylvania does not impose income tax on payments
you receive that are commonly recognized retirement
benefits distributed from eligible employer-sponsored
retirement plans. Eligible employer-sponsored retirement
plans can, but do not necessarily, include employer-
sponsored deferred compensation plans; pension or
profit sharing plans; 401(k) plans; thrift plans; thrift savings
plans; and employee welfare plans. Ask your
employer or plan administrator if your employer's retirement
plan is an eligible plan for PA income tax purposes.
Eligible non-employer-sponsored retirement plans can,
but do not necessarily, include Individual Retirement
Accounts (IRAs) and Roth IRAs.
The contributions you make to your employer's sponsored
retirement plan are PA-taxable compensation,
even if your contributions are not taxable for federal
purposes or included in the state wages shown on
- Distributions from Employer-Sponsored Qualified
Retirement or Deferred Compensation Programs
All amounts you receive from your employer's PA qualifying
retirement or old age benefit plan are taxable in
the year you receive the payments, except:
1. Payments you receive after you qualify for retirement
2. Payments you receive that you rollover into another
deferred payment program or retirement IRA, but
only when the transferred amounts are not taxable
income for federal purposes.
3. Distributions from an employer-sponsored deferred
compensation plan that represent your previous
4. Payments paid to the estate or designated beneficiary
upon an employee's death are not PA-taxable
income on the employee's final PA-40 or on the
decedent's estate or trust PA-41, PA Fiduciary
Income Tax Return or on the beneficiary's PA-40.
5. All distributions (regardless of the distribution code
reported in Box 7 of the 1099-R) from the State
Employees' Retirement System, the Pennsylvania
School Employees' Retirement System, the
Pennsylvania Municipal Employees' Retirement
System, and the U.S. Civil Service Commission
Retirement Disability Plan.
6. Retired or retainer pay of a member or former member
of a uniform service computed under Chapter 71
of Title 10, U.S. Code as amended.
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