Retirees facing large required minimum distributions (RMDs) at 75 have found a tax planning loophole. Relocating to a state with no income tax before executing a Roth conversion can significantly reduce the tax bill on that conversion.
Here's how the strategy works. When you convert a traditional IRA to a Roth IRA, you owe federal income tax on the converted amount. That tax bill is higher if your state charges income tax. Moving to a no-income-tax state like Florida, Texas, Nevada, or Wyoming before the conversion means you avoid state income tax on the conversion. Your federal tax liability stays the same, but the total tax burden drops.
The math is real. Converting $100,000 from a traditional IRA in a state with a 5 percent income tax costs roughly $5,000 more than doing the same conversion after moving to Florida or Texas. That savings compounds if you're converting large balances.
The strategy appeals to those with outsized RMDs. Once your required minimum distributions balloon at 75, the converted funds sit in a Roth where they grow tax-free. Future withdrawals from the Roth carry no tax liability. The conversion essentially trades current state income tax for tax-free growth.
But execution demands caution. The IRS scrutinizes relocations that appear timed solely for tax purposes. You need genuine residency. That means establishing a home, changing your driver's license, registering to vote, and updating your address with financial institutions and the Social Security Administration. Casual moves without authentic residency can trigger audits.
Timing also matters. The conversion should occur after you've established residency in the no-tax state. Moving to Florida in December and converting in January could raise red flags. Most tax pros recommend staying six months or longer.
Kiplinger notes additional complications. Some