State tax of inherited Roth
If my 83 year old father, who lives in Washington state, has a $2,000,000 IRA and converts to a Roth IRA, there are no state income taxes on the conversion because he lives in Washington state. I live in Oregon where there are state income taxes. If I inherit the Roth from my father would Oregon state income taxes be taken from my distributions? Should I move to Washington to avoid taxation on these distributions?
Permalink Submitted by Alan Spross on Fri, 2008-06-27 22:35
OR would not be taxing Roth distributions that are tax free to the beneficiary for federal tax purposes. I do not believe there is any state that taxes Roth distributions differently from the federal, whether inherited or not and the amount of taxes paid on the original conversion is immaterial .
Only if you took distributions of earnings prior to the 5 year holding period including his, would the earnings be taxable for both federal and OR. Since earnings come out last, that would be unlikely.
Permalink Submitted by Al Fry on Sat, 2008-06-28 14:45
Keep in mind also that the 5-year holding period continues even after death of owner. So as Alan said, there should be no tax on distributions if a normal lifetime stretch is used by the benificiary.
Permalink Submitted by Ken Marshack on Sat, 2008-06-28 16:59
So just to clarify: This money was earned in Oregon. Oregon state taxes were deferred because it is a qualified plan. My father moved to Washington. If he converts to a Roth, in Washington, there are no Washington state income taxes. Will Oregon then want any taxes on the conversion?
Then what you are saying is after his death, I as an Oregon resident would not pay any Oregon state taxes on the distributions either? Sounds too good to be true. Isn’t Oregon going to be pissed?
Permalink Submitted by Alan Spross on Sat, 2008-06-28 17:55
The prior posts were correct. You will not owe any taxes on qualified Roth distributions you take while living in OR.
You may be thinking of the old “source tax” under which states, particularly high tax states like CA and NY would pursue state tax on pensions earned in there states from out of state residents, eg CA retirees who moved to NV. However, the source tax was eliminated way back in 1996 by Congress and these states cannot pursue those taxes. In addition, retirees often move to lower tax states and then convert funds to a Roth IRA, incurring only the federal tax.
OR is well aware that many WA residents are working in Portland and other northern OR locales while living just across the river in tax free WA. You don’t have anything to worry about, and a conversion may be wise as long as he considers all the factors involved.
Permalink Submitted by Ken Marshack on Sat, 2008-06-28 19:17
“OR is well aware that many WA residents are working in Portland and other northern OR locales while living just across the river in tax free WA.”
Yes, and Oregon TAXES the Washington residents on all earned income from Oregon, even though they live in Washington.
Only unearned income is not taxed in Washington if you work in Oregon.
So you can see why I am concerned why they may want part of the Roth as well.
Thanks for clearing this up for me.