Rollovers to Roth IRAs

Federal law (sec. 408A(d)(3)(A)(iii), Internal Revenue Code) provides that a taxpayer who rolls over a distribution from a regular IRA (or other eligible retirement plan) to a Roth IRA in any taxable year beginning in 2010 is to include the taxable amount of the distribution in income in equal amounts over a two-taxable-year period beginning with the first taxable year beginning in 2011. The taxpayer may elect to include the entire taxable amount in taxable income for 2010.

This federal provision also applies for Wisconsin tax purposes.

The entire IRA distribution is considered received by the taxpayer in the year of the rollover (2010). Internal Revenue Code sec. 408A(d)(3)(A)(iii) affects only when the income is reported, not when the distribution creating the income takes place. Therefore, Wisconsin requires the taxpayer to pay tax on the distribution for each of the two years in which the income is reportable, even if the taxpayer becomes a nonresident of Wisconsin during the two-year period.

Example 1: The taxpayer was a legal resident of Wisconsin for 2010. During 2010, the taxpayer rolled over a $40,000 distribution from a regular IRA to a Roth IRA. The taxpayer will report the taxable distribution over the two-taxable year period ($20,000 per year). In 2011, the taxpayer abandons his Wisconsin residency and establishes a new legal residence in Florida.

The $20,000 that is includable in the taxpayer's federal adjusted gross income in tax years 2011 and 2012 is taxable by Wisconsin. The taxpayer must file a Wisconsin income tax return (Form 1NPR) for each year (2011 and 2012) and report $20,000 as Wisconsin income each year.

Example 2: The taxpayer was a resident of California for 2010. During 2010, the taxpayer rolled over an $80,000 distribution from a regular IRA to a Roth IRA. The taxpayer will report the taxable distribution over the two-taxable year period ($40,000 per year). In 2011, the taxpayer moves to Wisconsin and becomes a legal resident of Wisconsin.

The $40,000 that the taxpayer must report on his federal income tax return in each of the years, 2011 and 2012, is not taxable by Wisconsin. Since federal law provides an election to report the entire taxable amount in the year of the distribution, the taxpayer will be deemed, for Wisconsin tax purposes, to have elected to report the entire amount of income in the year of the distribution when he was a nonresident. Therefore, no amount of the distribution will be taxable by Wisconsin. (Note: Even if the taxpayer had moved to Wisconsin in 2010, as long as the IRA distribution occurred before the taxpayer became a Wisconsin resident, no amount would be taxable by Wisconsin.)

Note: This article does not apply to a 2010 rollover from a section 401(k) or 403(b) plan to a designated Roth account within the same plan. Wisconsin has not adopted the provisions of federal P.L. 111-240 which provided for the rollover of a distribution from a section 401(k) or 403(b) plan to a designated Roth account. For information on the Wisconsin tax treatment of such distributions, see the article Tax Treatment of Rollover Distributions From Section 401(k), 403(b), or 457(b) Plans, which is available on the department's website at www.revenue.wi.gov/taxpro/news/101025.html.

Last updated March 2, 2011