Conservatively Speaking

Wisconsin needs to act now on Roth IRA conversions

Posted by Mary Lazich on Jan. 22, 2010

Economy, Legislation

A possibly lucrative retirement account conversion went into effect January 1, 2010. Under a new federal rule, people earning more than $100,000 may convert their assets from a traditional IRA to a Roth IRA. Previously, only people earning less than $100,000 could make the switch without penalties.

The beauty of the conversion is that Roth withdrawals are tax-free.

However, there is a big problem.

Wisconsin residents are unable to take full advantage of the Roth conversions because the state Legislature has failed to take action to approve the tax changes in compliance with the new federal rule. Adding insult to injury are reports that Wisconsin could be the only state in the country that is not in line with the new federal tax changes.

How did that happen?

The all-important decision by the Legislature to adopt changes so conversions to Roth IRA’s could take place penalty-free should have and could have been made during last year’s 2009-11 state budget process. However, Democrats that control the Legislature’s Joint Finance Committee balked.

What does that mean for holders of traditional IRA accounts that want to convert to Roth IRA’s?

Until Wisconsin adopts the new federal tax rules, account holders that make conversions from traditional IRA to Roth accounts could, according to the Milwaukee Journal Sentinel, “pay initial penalties of as much as 5.3% of the money they transfer, and 2% a year from there on.”

The Journal Sentinel also wrote about a November 12, 2009, report by the Legislative Fiscal Bureau’s Rick Olin:

“If Wisconsin went along with federal rules, the state would pull in $1 million of tax revenue in fiscal 2011 and $1.5 million in fiscal 2012 because it would collect taxes on the money converted, the report says. That would turn around in fiscal 2013, when the state would potentially lose $1.7 million of tax collections because the Roth withdrawals would be tax-free, it says. The state Revenue Department estimates that 2013 loss at $1.3 million.”

State coffers aren’t the big losers. That distinction belongs to innocent Wisconsin citizens that are being penalized for being unaware of the changes in federal tax laws and the state’s inaction on the matter.

Another effect of the Legislature’s failure to adopt the new tax rule changes is that financial experts spend extra time and money in their tax preparations. The tax laws are complex enough without accountants in Wisconsin having to deal with laws that differ from those issued by the federal government.

The state Legislature needs to adopt the necessary changes quickly so that Wisconsin residents can begin to consider whether converting to Roth IRA’s is beneficial. One financial expert told the Journal Sentinel such a move by the state should be a layup. Unfortunately, nothing supposedly this simple comes easy in Madison.