When you make a Roth conversion, the costs will depend on where you live.

Converting money to a Roth IRA has a major upside, and a major downside. The benefit is tax-free portfolio growth and income. When you withdraw money from a Roth account in retirement, it will be untaxed and will not apply to your taxable income. The cost of this is that when you put money into a Roth account, you must pay federal, state and local income taxes on it, including when you make a conversion from a pre-tax account like a 401(k) or traditional IRA.

While your federal taxes will be the same regardless of jurisdiction (territories aside), your state and local taxes will depend on where you live. Florida, for example, is one of the most inexpensive places to make a Roth conversion. It has no state or local income taxes, so there are no additional costs to convert a Roth IRA in Florida. Federal taxes will still apply, with your marginal tax rate depending on how much income you make and how much you convert in a given year.

Roth conversions may require advance planning and multiple steps to minimize your taxes. Consider matching with a financial advisor if you would like professional advice.

What Are Conversion Taxes?

A Roth IRA is what’s called a post-tax retirement portfolio. This means that you fund the portfolio with money on which you have already paid taxes. This is as opposed to a pre-tax portfolio like a 401(k) or a traditional IRA, where you receive a tax deduction for all contributions.

With Roth IRA contributions, this process is straightforward. You receive earned income (money paid for work). You include this money in your taxable income, with taxes withheld if you have an employer. You can then deposit the remainder into your Roth IRA up to the portfolio’s annual contribution limit ($7,000 in 2024, with an additional $1,000 in catch-up contributions for those over age 50).

A Roth IRA conversion works differently. With a conversion you move assets from an existing pre-tax portfolio and deposit them into a Roth IRA. There is no limit to how much money you can convert nor to how often you can make a conversion, as long as the assets come from a qualified pre-tax portfolio. If you are under the age of 59 1/2 you must leave this money in place for five years after the conversion, but otherwise you can then withdraw the funds and gains untaxed.

However, because the assets come from a pre-tax portfolio, you will not have paid taxes on this money yet. As a result, when you convert assets into a Roth IRA, you must include the entire value of the conversion in your income taxes for that year. For example, say that you move $100,000 from your 401(k) to a Roth IRA. When you file taxes for this year, you will increase your taxable income by $100,000 and pay taxes accordingly.

Conversion taxes are assessed on the value of the assets at the time you convert them. So, for example, say that you have contributed $50,000 to your 401(k) over time. The portfolio has grown and is worth $75,000 when you process the Roth conversion. You will owe taxes on $75,000.

A financial advisor can help you make conversion and tax projections based on your circumstances and goals.

State and Local Conversion Taxes

Conversion taxes increase your taxable income for all income tax purposes. They do not increase your FICA taxes; you do not pay Medicaid or Social Security taxes on a Roth conversion. They do, however, apply to all state and local income taxes.

A Roth conversion increases your total taxable income for the year. This is applied to any income taxes, including state income taxes (if any) and municipal income taxes (if any).

This can make a Roth conversion particularly expensive in a higher-tax jurisdiction. For example, say that your state charges a 3% income tax and you convert $100,000 to a Roth IRA. This would raise your state income taxes by at least $3,000 ($100,000 * 0.03). The same is true for any municipal taxes charged by your city.

Florida Conversion Taxes

Florida has no income taxes at either the state or local level.

If you make a Roth conversion in Florida, you will not owe additional taxes to this jurisdiction. You will still owe federal income taxes on your Roth conversion. This is true regardless of which state you live in. However, you will not have any additional state or municipal taxes to pay.

This makes Florida a relatively inexpensive state for making a Roth IRA conversion. It is significantly less expensive to make a conversion in this state than in most other jurisdictions, since most states have some level of income tax.

Now, it’s important to remember that states still must generate revenue somehow. Florida offsets its 0% income tax with one of the higher sales taxes in the country.

Ultimately, as a Florida resident, you can make a Roth conversion relatively inexpensively. A financial advisor may be able to help you navigate the nuances.

The Bottom Line

Florida has no state or municipal income taxes. This means that for a Florida resident, a Roth IRA conversion only involves additional federal income taxes.

Tips On Maximizing Your Roth Account

A Roth IRA can be one of the best retirement portfolios there is, if you manage it correctly. Expensive up front, entirely tax-free in retirement, here are seven benefits of maximizing your Roth IRA.
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