What Wisconsin Retirees Should Know About Roth Conversions
What Wisconsin Retirees Should Know About Roth Conversions
A Roth conversion can be a valuable retirement-planning tool, but it also creates an immediate tax consequence.
When money is converted from a traditional IRA to a Roth IRA, the taxable portion of the amount converted is generally included in federal gross income for the year of the conversion.
That's why the real question usually isn't:
“Should I do a Roth conversion?”
It is:
“How much should I convert, and when?”
How Does a Roth Conversion Work?
A Roth conversion moves money from a pre-tax retirement account, such as a traditional IRA, into a Roth IRA.
Unlike traditional IRA withdrawals, qualified Roth IRA withdrawals can generally be received tax-free later.
But the tradeoff is that a conversion generally accelerates income tax into the year of conversion.
For example, converting $50,000 of pre-tax IRA money may add approximately $50,000 to federal taxable income before considering other adjustments.
RMDs Can't Be Converted
Once you are subject to required minimum distributions, the amount that must be distributed for that year cannot itself be converted to a Roth IRA.
The required distribution must generally be taken first.
After satisfying the RMD, additional eligible IRA funds may potentially be converted.
Wisconsin Has a New Roth-Conversion Opportunity
This is especially interesting for Wisconsin retirees.
Beginning in 2025, taxpayers who are at least age 67 may qualify for Wisconsin's new retirement-income subtraction of up to $24,000.
And Wisconsin DOR has specifically confirmed that income resulting from converting a traditional IRA to a Roth IRA may qualify for the subtraction if the taxpayer meets the applicable requirements.
So a Roth conversion could potentially:
remain taxable federally,
while some of the conversion income may qualify for a subtraction on the Wisconsin return.
That doesn't make every Roth conversion a good idea, but it gives Wisconsin taxpayers another variable to consider when deciding how much to convert.
The $24,000 / $48,000 Limits Matter
An eligible taxpayer age 67 or older may subtract up to $24,000 of qualifying retirement income.
A married couple filing jointly can potentially subtract as much as $48,000 when both spouses are at least age 67.
The subtraction is not limited by an overall income phaseout.
However, taxpayers claiming the subtraction generally cannot claim Wisconsin tax credits that year, so the interaction should be evaluated carefully.
Why Conversion Timing Matters
A large Roth conversion can push more income into a higher federal tax bracket.
It may also affect other income-sensitive items.
That's why conversions often make more sense as a multi-year strategy rather than moving a large retirement account all at once.
For someone approaching retirement, lower-income years between retirement and the start of large RMDs may be especially worth evaluating.
Roth Conversions Are a Tax-Planning Decision
A conversion shouldn't be evaluated simply by asking whether Roth accounts are “better” than traditional IRAs.
The calculation may involve:
your current tax bracket,
your expected future tax bracket,
future RMDs,
Social Security,
available cash to pay conversion taxes,
Wisconsin's retirement-income subtraction, and
your broader retirement and estate goals.
