State taxes on an IRA to Roth conversion

I’m trying to figure out STATE tax on a Roth conversion.

My state doesn’t do IRA contributions pre-tax. So my IRA contributions were already state-taxed, but the earnings have not been, and are taxable as income. (No, I’m not going to move to a different state for this!)

So, here’s a scenario – let’s say the IRA is $100,000. The contributions were $40,000, so the earnings were $60,000, and subject to state tax. (made up numbers for simplicity!)

If I convert $20,000 from the IRA to a Roth, how do I account for the contributions? A straight percentage doesn’t seem right because that will vary year-to-year as the balance changes.
Or maybe the first $40,000 are “exempt” then after that I pay the tax?

I’m not clear that the investment fund will do this accounting on the end-of-year statement (I’m asking, waiting for an answer). I hope they do the calculations since they know my contributions (though rollovers complicate things, since they don’t know my contributions for those!)

Does anyone have experience in doing this? The federal tax part is easy, but the state taxes vary and can be tricky.

I sort of found an answer – for Federal Taxes, if you have non-deductible IRAs, Form 8606 would be used. For each year, you report the final IRA account balance (of ALL IRA accounts!), the amount converted to Roth that year, then calculate a percentage that is not taxable.

So I imagine that the state tax would be calculated in a similar way (with a different tax rate).

For your state contributions have a basis. In your example your basis is $40,000.
When you convert 20,000 of a 100,000 ira, your basis would decrease by 20%, a value of $8,000.

At the Federal livel, it is similar to having an after tax amount in your TIRA and doing a conversion. You use Form 8606 to keep track of your basis in the TIRA.

I’m sure your state has a similar form for your contributions and subsequent Roth Conversions.

Do not expect the investment fund to keep track of your after tax contributions at the state level.

Clydewolf Thanks!

True - -the investment fund actually can’t keep track of all contributions – for example, I’ve done rollovers, and they would have no idea what my original basis was from those!

So another question occurred to me – the federal form 8606 says to list ALL of your IRAs, even if you’re only converting from one fund.

I also have a 403b that I want to convert part of to a Roth (there are 403b Roths, so I can do that).

I’m wondering if I have to total up the 403b and my traditional IRA both (even if I’m only converting part of one of them now).
I feel like I want to keep them separate. But they’re actually very similar in that they are pre-tax, no matching retirement funds.

You should ask your 403b custodian if you can convert those 403b pre tax funds to a Roth 403b. You can convert the pre tax 403b funds to a Roth IRA.

Form 8606 is for keeping track of your after tax basis in your Traditional IRA.

Yes, thank you.
I’ve checked on all of that. I can convert it.
Form 8606 is Federal, but I’m going to use it as a guideline for calculating my state taxes.

My IRA and 403b both are completely pre-tax, so the federal tax is easy to do (but not fun to pay!).
It’s the state tax that is more complicated because my contributions were all after-tax.

I think form 8606 is a good guideline, and I’ve run sample calculations which seem to make sense.