Wisconsin’s rules will now follow federal guidelines for Roth IRA conversions
Wisconsin Governor Jim Doyle signed a bill yesterday that brings the state treatment of Roth IRA conversions into line with federal treatment. The state Assembly and Senate passed the bill in February.
“Prior to enactment, Wisconsin was the only state in the country with restrictions on Roth conversions. Now, state taxpayers at all income levels can consider a Roth IRA conversion without the fear of being assessed various tax penalties,” said Tim Steffen, CFP, financial and estate planning for the private wealth management group at Milwaukee-based Robert W. Baird & Co. “Deciding whether or not to convert an IRA to a Roth IRA is a complicated decision that involves a variety of factors. With the enactment of this law, all Wisconsin taxpayers will have the opportunity to make that decision for themselves and their family.”
In January, federal guidelines were changed, allowing those who earn more than $100,000 per year to convert IRAs to Roth IRAs.
If the law were not changed, Wisconsin residents earning more than $100,000 per year who converted their IRAs could have faced several penalties, including:
A 3.3 percent early distribution penalty for the amount converted for taxpayers younger than 59.5 years old.
Any amount that is rolled into a Roth IRA could have been treated as a contribution and subjected to a $5,000 annual maximum. If the amount exceeded that limit, it might have been subject to a 2 percent penalty.
“This means that a Wisconsin resident doing a conversion in early 2010 would face uncertainty as to the state tax treatment of the transaction,” Steffen said.
