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Roth IRA Conversions, Is it Worthwhile For a Person to Change State of Residence Before Converting ?

Posted by James M. Carlson
Jul 15 2015

For most individuals it will not be worth the effort or the inconvenience to change their state of residence prior to doing a Roth IRA conversion contribution. For others, not having to pay state income tax on the conversion will make it worthwhile.

When one converts the funds within his traditional IRA to a Roth IRA, he will include the taxable amount in his income for federal income tax purposes.

What about state income tax? Individuals residing in states with incomes taxes will also need to pay state income tax on the amount converted if they reside in a state that assesses an income tax. For some, this may be substantial as the highest tax rate is the following in: ( California-13.3%, Hawaii- 11.01%, Oregon-9.9%, Minnesota- 9.85%, Iowa - 8.98%, New Jersey- 8.97%, New York-8.82%, etc.).

For example: An individual residing in California, New York, Michigan, Minnesota, Iowa or any other state with an state income tax may wish to move to a state with no income tax ( Texas, Florida, Tennessee, Nevada, Wyoming, Washington, and South Dakota. ) for the period required under the various state laws to avoid paying the state income tax with respect to his Roth IRA conversion.

For most individuals it will not be worth the effort or the inconvenience, but for others the tax savings will make it worthwhile to move to a state without a income tax for a certain time period so that the individual may convert his or her Roth IRA and avoid paying state income tax. Under current laws, a person could return to his “home” state later after doing the conversion while residing in another state. Time will tell if these states will enact laws giving them the right to try to tax such funds even though the conversion had occurred when a person was a non-resident.

Categories: Pension Alerts, Roth IRAs