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Madelyn D. Leopold
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Thomas C. Groeneweg
Phone: (608) 257-9521
New Roth IRA Conversion Rules Alert
You may have seen letters, articles and seminars touting the advantages of the new Roth IRA conversion rules. Because Wisconsin has not adopted the federal provisions on Roth IRA conversions, a Roth IRA conversion will subject you to Wisconsin tax penalties if your modified adjusted gross income exceeds $100,000.
Beginning in 2010, the income tax treatment of Roth IRA conversions is different under federal and Wisconsin law.
- Wisconsin imposes tax penalties on Roth IRA conversions if your income is greater than $100,000. Roth IRA conversions are in the news again because, beginning January 1, 2010, federal law permits you to convert funds in regular IRAs to Roth IRAs regardless of your gross income. Although federal law permits the conversion regardless of income, Wisconsin will subject your Roth IRA conversion to the following tax penalties if your modified adjusted gross income exceeds $100,000:
- Early distribution penalty. If you are under age 59 1/2, Wisconsin will subject you to an early distribution penalty equal to 3.33% of the amount converted.
- Excess contribution penalty. Regardless of age, Wisconsin will subject you to a 2% excess contribution penalty that will be applied each year until the excess contribution is withdrawn.
- Wisconsin will not permit income tax deferral on the 2010 conversion. For 2010 Roth IRA conversions, federal law permits you to postpone tax payment on the amount converted until your 2011 and 2012 tax returns are filed. In contrast, Wisconsin requires you to pay the income tax due on your 2010 Roth IRA conversion with your 2010 Wisconsin income tax returns.
Make sure that you understand how your Roth IRA conversion will be taxed by both the federal and state tax authorities before converting. It is possible that the Wisconsin legislature may adopt the federal provisions regarding Roth IRA conversions in 2010. We recommend that you consult with your tax advisor before proceeding with a Roth IRA conversion.
This legal update is not legal advice. Individuals should seek advice based on their particular circumstances from their own counsel.
