IRA Conversion to Roth - MFS in Community Property State

[johamill]

My wife and I file married separately in the community property state of New Mexico.  In 2021, we both converted traditional IRAs to Roth and paid estimated taxes on the conversions.  All of the accounts were contributed to during our marriage, but long before we lived in a community property state.  They've just been sitting for years, until 2021 when we moved old employer accounts into IRAs and then converted to Roths.  Does this need to be counted as income adjustment on Schedule 1, line 9 for the community property income adjustments, where you "even out" your income between the two of you?  Thanks!

[macuser_22]

The "I" in IRA is individual and only  be owned by one person.   It can never be "community property".  State law might give the spouse some right  to the proceeds of the IRA but that is a legal issue, not a tax issue,  Consult an attorney in your state for help with state law.

[johamill]

I understand what you are saying here, but I'm not sure that it answers the question.  Because a conversion from IRA to Roth IRA is counted as income for the person that owns it, it would be added to your gross income for the year.  

Simple example: My W-2 job pays $100k and my wife's pays $90k.  At tax time, I subtract $5k from mine and she adds $5k to hers, giving us both $95k.

Now say I convert $50k from IRA to Roth.  That counts as gross income for me, making my share $150k to my wife's $90k.

I'm asking if I now have to subtract $30k from mine and add $30k to hers to "even us out" for community property gross income.  We're not divorcing, we just file separately.  From what I'm reading, it seems that as long as the assets in the IRA were acquired during the marriage, which they were, that they count as community property, and therefore the gross income from the conversion should be divided.  I'm looking for someone to confirm that or provide me a better/correct understanding.

[RobertB4444 · Accepted solution]

@macuser_22 is correct.  The IRS guidance -

Withdrawals from individual retirement arrangements (IRAs) and Coverdell education savings accounts (ESAs).

There are several kinds of IRAs. They are traditional IRAs (including SEP-IRAs), SIMPLE IRAs, and Roth IRAs. IRAs and ESAs by law are deemed to be separate property. Therefore, taxable IRA and ESA distributions are separate property, even if the funds in the account would otherwise be community property. These distributions are wholly taxable to the spouse (or registered domestic partner) whose name is on the account. That spouse (or registered domestic partner) is also liable for any penalties and additional taxes on the distributions.

Further information on community property is available here.