Tax question related to Roth conversion

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168gr
Posts: 72
Joined: Fri Nov 16, 2012 5:06 pm

Tax question related to Roth conversion

Post by 168gr »

I'm a resident of Virginia, stationed in California on PCS orders. VA taxes my military income, CA does not.

I earn some money via 1099 contracting in California. This income is taxed by CA, not VA. (There is a very odd mechanism by which CA and VA resolve this; it consists of filing CA and VA tax returns, paying money to VA, and submitting a copy of my VA return to CA, which then gets its money directly from VA. I don't think this oddness is relevant to my question though.)

Some of that 1099 income was put in a SEP-IRA in 2009, 2010, 2011, and 2012. This reduced my tax liability to CA, not VA, during those years.

In 2013 I was deployed to a combat zone most of the year, so my taxable income was much lower than usual. Because my federal bracket was far lower than usual, I took this opportunity to do a Roth conversion of the entire SEP-IRA.

This conversion resulted in a taxable event.

Question: Do I owe California or Virginia the tax on this conversion? The money was earned, and the SEP-IRA contribution benefit was enjoyed in CA ... but I'm really a VA resident and as far as I can tell, a retirement account Roth conversion is a taxable event in the state of residence.
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grabiner
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Re: Tax question related to Roth conversion

Post by grabiner »

A withdrawal from an IRA, including a conversion, is taxed in your state of residence, independent of where you earned the money. Once the money is in an IRA (or even in a 401(k) or other employer plan), it is just money, and your money lives wherever you live. (Many states will tax deferred compensation according to where it was earned, but they are not allowed to do this with retirement accounts.)
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168gr
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Joined: Fri Nov 16, 2012 5:06 pm

Re: Tax question related to Roth conversion

Post by 168gr »

Thank you, that's what I thought. Appreciate the reply.
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