I love helping my clients maximize their tax-free retirement income streams. Converting a traditional IRA account to a Roth IRA is a fabulous part of a proactive tax-planning strategy to reduce the tax drag on your retirement income. However, many people forget about state taxes when developing the optimal Roth conversion strategy for their personal financial and tax-minimization needs.
Most people focus on federal tax rates when choosing how large a Roth conversion to do each year. Ignoring state taxes could leave you without enough cash on hand to pay the taxes due on the Roth conversion. It could cause other income to be taxed at higher rates than necessary.
States That Won’t Tax Your Roth Conversions
If you live in a state with no income taxes, you won’t owe taxes at the state level on your Roth conversion. These states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. If you live in New Hampshire, IRA distributions are untaxed, which means you won’t owe additional state taxes on your Roth conversions.
Residents are exempt from state taxes on conversions since these states do not impose income taxes. In New Hampshire, taxes are levied on interest and dividends, but other states’ rules are a bit more nuanced. For example, in Iowa, individuals who are at least 55 years old can exclude up to $6,000 ($12,000 for married filing jointly) of retirement income, with Roth conversion income qualifying for this exclusion. In plain English, you can do a $6,000 Roth conversion without owing additional state taxes in Iowa.
Roth Conversion When You Are Moving States In Retirement
If you are planning to move to another state after you have retired or between now and making withdrawals from your IRA, state taxes could play a role in your Roth conversion strategy. For example, if you are moving from a higher to a lower-tax state, it could be beneficial for you to wait to make Roth conversions. Vice versa, if you are moving from a lower-tax state to a higher-tax state, you may want to front-load more Roth conversions.
You may be wondering how big of a difference it could make if you moved to another state. California has a top tax bracket of 13.3%. If you are in this top tax bracket, are you talking about an income of around $1 million or more? There is much room for proactive Roth conversion tax-planning strategies to save tens of thousands, if not hundreds of thousands, of dollars across your retirement.
When To Make A Roth Conversion
Ideally, you would make a Roth conversion during a combined year of lower income and a drop in the stock market. The drop in the stock market means you can get a larger percentage of your retirement savings over to a Roth IRA with minimum taxes. A tax year with lower income brings a lower tax bill for making the conversions.
If you are still working and able to contribute to a Roth IRA, ideally, you would make this contribution before making a Roth conversion. For 2025, you can contribute up to $7,000 ($8,000 for those who are at least 50 years old), assuming your income is not too high. Another way to get much larger chunks of money into a Roth account is the mega backdoor Roth via your 401(k) plan.
While I don’t have a working crystal ball, the government debt continues to grow, and the bill will come due at some point. When it does, taxes will have to go up; there just is not enough fat (including waste or fraud) in the federal budget to avoid increasing taxes. The draconian cuts to the IRS staffing and budget will likely exacerbate this problem. As a result, the IRS could end up collecting even less of the taxes due under current law and tax rates. In case you were wondering, the tax gap (the difference between taxes due and taxes paid) was an estimated $696 billion in 2025. This was before DOGE and Elon Musk announced the goal of cutting up to 50% of the IRS staffing.
The point of throwing in the likelihood of higher taxes in the future is that they make Roth conversions today even more valuable.
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