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).
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.