Roth IRA Conversion in Kentucky

3 replies
92 views

Does KY tax a Roth IRA conversion from a pre-tax IRA account?

TurboTax Deluxe Windows

Alumni - Intuit

@frostbj First of all, you make a great statement by saying "if the law stays the same". With the political volatility surrounding the KY-pension system right now, there is no guarantee what the law will be. Before 2018, $41,110 of pension income was exempted in KY, and that strange number had been the exempt amount for years. But, it changed in 2018, partly on the heels of KY conforming to the TCJA of 2018, but the pension system also had its own separate issue, which still is being debated.

What I can tell you is that any portion of pension (IRA is in the same category as pension income) that ends up being taxable in KY is taxed at 5%. It seems more likely than not that you are able to exempt 31,110, and then anything above that amount would be taxable in KY. (How much tax you end up paying could also depend on other deductions and credits that you are entitled to claim.) Another thing to consider is that if you are married, and your spouse has an IRA, your spouse may also claim the $31,110 exemption from any conversion made of their IRA to a Roth IRA.

But for argument's sake, let's say you are a single filer. At a minimum, you should be able to convert $33,700 without tax. This amount represents $31,110 that will be exempted and the KY standard deduction for 2019 of $2590. If you itemize in Kentucky (which consists of deductible mortgage interest plus charitable deductions), the amount of income not tax will increase by however much more you can claim in KY itemized deductions over the standard deduction.

The rest will be up to you to decide. If you are using TurboTax, you can test out the numbers using what makes sense to your situation as a hypothetical tax return. (TurboTax 2019 online is already available for this).

Also keep in mind that Roth-IRAs are not subject to RMD's. Thus, if you are able to make a partial conversion of your current IRA to a Roth, you are also reducing your IRA, which is lowering the amount of RMD that will need to be taken in the future as well. You may want to discuss with your financial planner the details of how much you are required to take for RMDs once you reach the applicable age.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

DanielV01

Alumni - Intuit

It depends. KY will exempt up to $31,110 of taxable pension income, which includes IRA distributions. If the conversion is greater than $31,110, it is likely that some of it will be included in taxable income. If the conversion is less than $31,110, this amount that is taxable on the Federal Return will not be taxable in Kentucky.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

F

frostbjAuthor

Level 2

I was thinking of doing the maximum amount of conversion that keeps me in the 12% tax bracket for Federal purposes which is more than the $31K you cited (approximately $60K). However, if future required minimum distributions are not taxable up to $31K in KY (assuming the tax law stays the same), I would be eroding my federal tax savings in the future by paying incremental state taxes now. As such, perhaps the best overall tax strategy would be to limit the conversion each year to $31K.

Am I understanding your answer to my original question correctly?

Thanks!

DanielV01Answer

Alumni - Intuit

@frostbj First of all, you make a great statement by saying "if the law stays the same". With the political volatility surrounding the KY-pension system right now, there is no guarantee what the law will be. Before 2018, $41,110 of pension income was exempted in KY, and that strange number had been the exempt amount for years. But, it changed in 2018, partly on the heels of KY conforming to the TCJA of 2018, but the pension system also had its own separate issue, which still is being debated.

What I can tell you is that any portion of pension (IRA is in the same category as pension income) that ends up being taxable in KY is taxed at 5%. It seems more likely than not that you are able to exempt 31,110, and then anything above that amount would be taxable in KY. (How much tax you end up paying could also depend on other deductions and credits that you are entitled to claim.) Another thing to consider is that if you are married, and your spouse has an IRA, your spouse may also claim the $31,110 exemption from any conversion made of their IRA to a Roth IRA.

But for argument's sake, let's say you are a single filer. At a minimum, you should be able to convert $33,700 without tax. This amount represents $31,110 that will be exempted and the KY standard deduction for 2019 of $2590. If you itemize in Kentucky (which consists of deductible mortgage interest plus charitable deductions), the amount of income not tax will increase by however much more you can claim in KY itemized deductions over the standard deduction.

The rest will be up to you to decide. If you are using TurboTax, you can test out the numbers using what makes sense to your situation as a hypothetical tax return. (TurboTax 2019 online is already available for this).

Also keep in mind that Roth-IRAs are not subject to RMD's. Thus, if you are able to make a partial conversion of your current IRA to a Roth, you are also reducing your IRA, which is lowering the amount of RMD that will need to be taken in the future as well. You may want to discuss with your financial planner the details of how much you are required to take for RMDs once you reach the applicable age.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"