State Tax for Roth Conversions

I just learned that Roth Coversions may be subject to city and/or state tax if the investor is less than 59 1/2. Can anyone confirm this or dispell this?
I am in Michigan.



State income taxation varies from state to state, but absent some exemption for retirement income (which some states have), the Roth conversion would be taxable even after age 59 1/2. Nevertheless, the Roth conversion is often advantageous.



State income taxation varies from state to state, but absent some exemption for retirement income (which some states have), the Roth conversion would be taxable even after age 59 1/2. Nevertheless, the Roth conversion is often advantageous.



I believe there is an exception for state tax on IRA distributions for 59 1/2 year olds in Michigan, but I just found out that the exception doesn’t apply for those under 59 1/2….



[quote=”[email protected]“]I believe there is an exception for state tax on IRA distributions for 59 1/2 year olds in Michigan, but I just found out that the exception doesn’t apply for those under 59 1/2….[/quote]

….which is the case for Roth Conversions



From the MI state site on income tax, it appears an IRA distribution including a Roth conversion is taxable unless over 59.5 or part of a 72t plan. In that case the taxable income is a subtraction against state AGI. However, there also appears to be a cap on this subtraction of around 42,000 single and 84,000 married/joint.

Therefore, if under 59.5 the conversion would be taxable. While it is permissible to do a Roth conversion within 72t guidelines, this is quite rare.



Did I hear you correctly? Did you say that a Roth Conversion would be possible via the 72t rules?

So, lets say the S.E.P.P. schedule is set up, money leaves the T.IRA (who are the checks payable to, the investor? Also, I’m assuming taxes wouln’t have to be withheld) and then in turn is rolled over or redeposited into a Roth Conversion? Do we need to be sensitive to the 60-day rollover rule? If this is a conversion I would have to assume that the investor wouldn’t have to have earned income, right?

George



A Roth conversion has been approved within a SEPP for several years. It is best to do this by direct transfer, and it MUST go into a newly created Roth account. Like any Roth conversion, these do not count toward the one rollover per 12 month rule.

Another critical factor is that NONE of the SEPP distributions can be converted to a Roth, since that would be a rollover of a SEPP distribution and they are not rollover eligible. The taxes for the conversion CAN be paid from SEPP distributions. The reason that this is somewhat rare is that it presents a large unanticipated income tax cost, and most SEPP participants do not have the funds to pay those taxes. They would owe the usual taxes on the SEPP distributions plus the taxes on the conversion.

For example if you have a TIRA balance of 300,000 and an annual distribution for the SEPP of 20,000, either part of that 20,000 or separate assets would be needed to pay the taxes. A partial conversion of the remainder of the TIRA would result in the Roth IRA being one of the SEPP accounts along with the current TIRA, and future SEPP distributions could come from any combination of the two accounts. The early withdrawal penalty for withdrawing from a Roth conversion inside of 5 years would not apply because of the SEPP exception to the penalty.

There is no earned income requirement, just the MAGI limit of 100,000 to be eligible for conversions through the end of 2009.

There might be some concern over PLR 2007 20023 that resulted in a busted SEPP after a partial transfer (not to a Roth), but the IRS has never explained their rationale and have also not hassled the thousands of taxpayers who have made a partial transfer within their SEPP. Still, that PLR should at least be considered before doing any partial transfer from a SEPP IRA account including a Roth conversion.



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