Roth conversion and state income taxes
Havent seen anything on this question/Point in the press.
I have given a lot of thought on the subject but have decided not to convert even though I agree with virtually all that has been written on the subject. I live in Oklahoma.. One of the state taxing states…. Best I can tell I will pay state income tax on the converted money from my IRA to Roth along with the federal tax bite.
It just so happens I have a son/grandkid in Texas, am from Tennessee with extended family there and have inlaws and another son in Ohio. These being the last few states with no state income tax leaves me in a ???.
Assume a 25% federal and 8% Okla state tax on the conversion … Cost 33% now on the conversion
IF I relocate to one of these other states (Texas most likely with a grandkid there) I would be later (10-20 years from now) withdrawing this money taxed in Okla (2010-11-12)but used in Texas(2020-2030) . The benifit of paying now and using later (at higher federal tax rates) goes out the window. My federal tax rate would have to go up 8% points for me to Break even.
Am I missing something or is this the way it would go assuming I moved to a non taxing state.
Permalink Submitted by Alan Spross on Wed, 2010-02-10 19:53
You are looking at this correctly. The state marginal rates may be going up along with the federal rates, and are a major factor in converion strategy.
If you can convert while a resident of a no tax or low tax state, the total conversion cost is reduced. In fact, if you then retired to a high income tax state, you might be better off if the high state income taxes were partially offset by lower property or sales taxes in that state. If you move to a low state income tax state, just be sure you have established permanent residency there so your former state does not come looking for their taxes based on any evidence that you have not totally left the state.