IRA Contribution Limits, Same Sex Couples
Same sex registered domestic partners and same sex married couples must file their California income tax returns as “married” and their federal income tax returns as “single.” A result is that an IRA contribution or deduction which is allowed for federal purposes might be disallowed for California purposes.
For example. two individuals with modified adjusted gross incomes of $100,000 each are entitled to contribute to a Roth IRA for federal purposes (the limit is $127,000 per person) but not for California (the limit is $179,000 per couple).
California Publication 737 (2011) says any Roth contributions by such a couple would be treated as excess contributions for California purposes. The publication goes on to say “However, California does not impose the six percent excise tax that is imposed under federal law on excess contributions to Roth IRAs. If Chris or Pat receives a “qualified distribution” from a Roth IRA, the “qualified distribution” is tax-free and is not includible in their California taxable income. This tax-free treatment applies even if the “qualified distribution” includes earnings attributable to a previous “excess contribution” for California purposes.”
The implication seems to be that California’s IRA contribution limits can be ignored with impunity.
Comments would be appreciated. The strategy of converting a contribution to a nondeductible IRA is not effective in my situation.
Permalink Submitted by Alan Spross on Mon, 2012-03-19 17:27
Peter,
While I have not taken the time to test this conclusion using different situations for RDPs, this particular example in Pub 737 (https://www.ftb.ca.gov/forms/2011/11_737.pdf) appears designed as part of an overall intent not to introduce any new CA IRA penalties when using the new RDP filing status for CA would have resulted in federal penalties. CA never did have it’s own excess contribution penalty, although it does have it’s own early withdrawal penalty of 2.5%.
Therefore, not charging the 6% excise tax for CA returns is nothing new, and neither is the tax free distribution of earnings generated on excess contribution money. Under federal rules, if at least one 6% excise tax is paid on an excess contribution, the earnings get to stay in the account and can become qualified. While a Roth cannot become qualified until at least 5 years pass from the first ALLOWABLE contribution, if there is at least one such contribution, there could be several interim excess contributions that generate tax free earnings once the Roth is qualified, and that also applies to CA.
In this example, the point is that CA is not coming up with any new penalties that would have applied at the federal level had the RDPs filed jointly at the federal level and produced a federal excess. And CA is not going to charge the 2.5% early withdrawal penalty in cases where the federal would not charge the 10% penalty. So this may appear to offer broader benefits to RDPs than it actually does in practice.
CA conforms to IRS rules for retirement plan, but the CA RDP filing status forced CA to issue some new rules dealing with possible consequences. Of course, there might be other questions that could surface in other RDP related IRA situations that don’t have examples published in Pub 737.
Some CA taxpayers are still dealing with the non conforming IRA deduction rules of the early 80s that resulted in CA taxpayers having a higher basis % than they do for the federal on Form 8606. This has probably resulted in the lesson that non conformity with federal retirement plan rules just results in needless complexity and confusion.