Moving to WA...when can I do Roth Conversions?

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TwoBitsCA
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Moving to WA...when can I do Roth Conversions?

Post by TwoBitsCA »

Hi, I am retiring on Wednesday and moving from MD to WA in June. I wanted to do some Roth conversions while the market is down and we are living in a state with no income tax but don't know if I have to wait until certain milestones are cleared...do I need to establish residency by doing something like getting a driver's license, register to vote, pay federal taxes? My 457 plan consultant suggested I wait until next year because he wasn't sure if I qualify to do anything this year.
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Duckie
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Re: Moving to WA...when can I do Roth Conversions?

Post by Duckie »

TwoBitsCA wrote: Mon May 16, 2022 4:17 pm Hi, I am retiring on Wednesday and moving from MD to WA in June. I wanted to do some Roth conversions while the market is down and we are living in a state with no income tax but don't know if I have to wait until certain milestones are cleared...do I need to establish residency by doing something like getting a driver's license, register to vote, pay federal taxes? My 457 plan consultant suggested I wait until next year because he wasn't sure if I qualify to do anything this year.
I don't know how grabby Maryland is (I live in California and they are extremely grabby) but if you choose to wait until next year to convert, one option is to sell your funds/ETFs now while the market is down, put the money into the settlement fund or money market, and convert next January when you won't have to deal with Maryland's taxes. Whether or not waiting is worth it is up to you.

If you convert this year you will need to report your conversion income on the Maryland 2022 Form 502. I'm not exactly sure how or if Maryland will tax it. The section 26 instructions (pg 21) are complicated.
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TwoBitsCA
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Re: Moving to WA...when can I do Roth Conversions?

Post by TwoBitsCA »

Thank you for the reply Duckie!
Marseille07
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Re: Moving to WA...when can I do Roth Conversions?

Post by Marseille07 »

Be sure you've visited WA in the winter. I can't say I like the weather here and looking to move to another no-income-tax state.
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FiveK
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Re: Moving to WA...when can I do Roth Conversions?

Post by FiveK »

Duckie wrote: Mon May 16, 2022 5:33 pm If you convert this year you will need to report your conversion income on the Maryland 2022 Form 502. I'm not exactly sure how or if Maryland will tax it. The section 26 instructions (pg 21) are complicated.
Excellent reference.

TwoBitsCA, based on
If you ended residence in Maryland in 2021, the last day of the
“tax year” was the day before you established residence in
another state."
and Washington State residency definition, the earlier you can establish a WA residency the earlier you can earn income not subject to MD tax. See 26(j) on p. 21 of the MD document. That's not legal advice, so do read for yourself.
bsteiner
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Re: Moving to WA...when can I do Roth Conversions?

Post by bsteiner »

Among other things you have to actually move to Washington.
Charon
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Re: Moving to WA...when can I do Roth Conversions?

Post by Charon »

TwoBitsCA wrote: Mon May 16, 2022 4:17 pm I wanted to do some Roth conversions while the market is down
Make sure you check your math that this makes sense. Normally there is no advantage to converting if the market is down vs. any other time; the considerations all remain the same (about tax brackets now and in the future).

Welcome to WA. It's great. Wait, I mean it's terrible. I'd like for people to stop moving here and running up the housing prices.
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Re: Moving to WA...when can I do Roth Conversions?

Post by Charon »

Marseille07 wrote: Mon May 16, 2022 7:06 pm Be sure you've visited WA in the winter. I can't say I like the weather here and looking to move to another no-income-tax state.
That's... vague. Do you live in Forks? Port Angeles? Tacoma? Skykomish? Yakima? Mazama? Richland? Spokane? There is no "weather" of Washington, broadly speaking, which is normal for large coastal states with mountain ranges: https://commons.wikimedia.org/wiki/File ... B6ppen.svg , compare to Maryland https://commons.wikimedia.org/wiki/File ... B6ppen.png. (Unless you're one of those people who thinks Seattle = Washington.)

But by all means, feel free to move elsewhere. Houses are too expensive here :D
Marseille07
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Re: Moving to WA...when can I do Roth Conversions?

Post by Marseille07 »

Charon wrote: Mon May 16, 2022 10:09 pm
Marseille07 wrote: Mon May 16, 2022 7:06 pm Be sure you've visited WA in the winter. I can't say I like the weather here and looking to move to another no-income-tax state.
That's... vague. Do you live in Forks? Port Angeles? Tacoma? Skykomish? Yakima? Mazama? Richland? Spokane? There is no "weather" of Washington, broadly speaking, which is normal for large coastal states with mountain ranges: https://commons.wikimedia.org/wiki/File ... B6ppen.svg , compare to Maryland https://commons.wikimedia.org/wiki/File ... B6ppen.png. (Unless you're one of those people who thinks Seattle = Washington.)

But by all means, feel free to move elsewhere. Houses are too expensive here :D
Sigh, it's you again.

I said WA because the OP said WA. So WA in this context is wherever in WA they want to retire to. Now, it is possible my comment doesn't apply to their location of choice.
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busdriver
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Re: Moving to WA...when can I do Roth Conversions?

Post by busdriver »

Charon wrote: Mon May 16, 2022 9:58 pm Normally there is no advantage to converting if the market is down vs. any other time; the considerations all remain the same (about tax brackets now and in the future).
I would disagree with that statement. If you're going to convert a given dollar amount, you will be able to convert more shares when the market is down vs up. Think of the conversion as being "On Sale." :sharebeer
dboeger1
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Re: Moving to WA...when can I do Roth Conversions?

Post by dboeger1 »

busdriver wrote: Mon May 16, 2022 11:07 pm
Charon wrote: Mon May 16, 2022 9:58 pm Normally there is no advantage to converting if the market is down vs. any other time; the considerations all remain the same (about tax brackets now and in the future).
I would disagree with that statement. If you're going to convert a given dollar amount, you will be able to convert more shares when the market is down vs up. Think of the conversion as being "On Sale." :sharebeer
It's only on sale to the extent that the tax paid on the conversion is less than the alternative costs.

Of course, as with many comparisons, these things can be complicated by a number of factors. Social Security taxation is weird, there are thresholds to be mindful, federal tax rates are low by historical standards, etc. There are reasons to convert more shares despite a similar before-and-after tax-bracket comparison, but they're not particular obvious or easy to predict. It's one of those things where hedging your bets and doing a 50/50 approach might be the right idea, because you never really know how wrong you're going to be on either side of the timeline.
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busdriver
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Re: Moving to WA...when can I do Roth Conversions?

Post by busdriver »

dboeger1 wrote: Mon May 16, 2022 11:15 pm It's one of those things where hedging your bets and doing a 50/50 approach might be the right idea, because you never really know how wrong you're going to be on either side of the timeline.
That's what I thought in March 2021 when I decided to do 1/2 my conversion amount thinking there would be another drop in the market. Sadly it never came. :(

You never know what the future will bring, but if one intends to convert a set dollar amount to reach a pre-determined agi/magi limit, there's efficiency in converting more shares with the market down.
dboeger1
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Re: Moving to WA...when can I do Roth Conversions?

Post by dboeger1 »

busdriver wrote: Mon May 16, 2022 11:40 pm
dboeger1 wrote: Mon May 16, 2022 11:15 pm It's one of those things where hedging your bets and doing a 50/50 approach might be the right idea, because you never really know how wrong you're going to be on either side of the timeline.
That's what I thought in March 2021 when I decided to do 1/2 my conversion amount thinking there would be another drop in the market. Sadly it never came. :(

You never know what the future will bring, but if one intends to convert a set dollar amount to reach a pre-determined agi/magi limit, there's efficiency in converting more shares with the market down.
Correct, that's why I mentioned that it's worth being mindful of thresholds. It's not so much the converting of additional shares in and of itself that saves money, because it only saves money if it ends up costing less than not converting. It's all the other related factors that determine whether that ends up being true or not. The obvious case is when people expect their before-and-after tax rates to be different, but I believe I was responding to a comment specifically ignoring the tax rate difference and just considering number of shares converted, which is why I tried listing some of the other factors to take into consideration, since tax brackets presumably didn't come into play.
chemocean
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Re: Moving to WA...when can I do Roth Conversions?

Post by chemocean »

TwoBitsCA wrote: Mon May 16, 2022 4:17 pm Hi, I am retiring on Wednesday and moving from MD to WA in June. I wanted to do some Roth conversions while the market is down and we are living in a state with no income tax but don't know if I have to wait until certain milestones are cleared...do I need to establish residency by doing something like getting a driver's license, register to vote, pay federal taxes? My 457 plan consultant suggested I wait until next year because he wasn't sure if I qualify to do anything this year.
I was looking at this issue myself. See url: https://dor.wa.gov/contact/washington-s ... definition

Get a WA fishing license, then do the Conversions. Of course, you probably need to drive to the lake or ocean (which means you probably will need WA insurance, which means you will have to register your car in WA, which requires you to have a WA drivers license with a WA address, which probably requires a lease or ownership in WA.).
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TwoBitsCA
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Re: Moving to WA...when can I do Roth Conversions?

Post by TwoBitsCA »

busdriver wrote: Mon May 16, 2022 11:07 pm
Charon wrote: Mon May 16, 2022 9:58 pm Normally there is no advantage to converting if the market is down vs. any other time; the considerations all remain the same (about tax brackets now and in the future).
I would disagree with that statement. If you're going to convert a given dollar amount, you will be able to convert more shares when the market is down vs up. Think of the conversion as being "On Sale." :sharebeer
Yes, this is my thinking as well. I want to convert the shares while they are on sale!
Katietsu
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Re: Moving to WA...when can I do Roth Conversions?

Post by Katietsu »

States all have their own rules. But, in general, when the intent is to abandon your old domicile, I believe you begin your new residency the day that you arrive at your new home. I would feel particularly comfortable with this if you were moving directly into a permanent abode (ie not a hotel or airbnb) and had the voter’s registration, driver’s license and such changed within a month of that date. Maybe even change your address with the brokerage holding the IRA before performing the conversion for good measure.
lstone19
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Re: Moving to WA...when can I do Roth Conversions?

Post by lstone19 »

Katietsu wrote: Tue May 17, 2022 12:24 pm States all have their own rules. But, in general, when the intent is to abandon your old domicile, I believe you begin your new residency the day that you arrive at your new home. I would feel particularly comfortable with this if you were moving directly into a permanent abode (ie not a hotel or airbnb) and had the voter’s registration, driver’s license and such changed within a month of that date. Maybe even change your address with the brokerage holding the IRA before performing the conversion for good measure.
I concur with the above. From what I've read, most of the battles with the aggressive states are where people haven't cleanly cut ties such as retaining a residence they then claim is a vacation home. Most states allow you 30 days or so to get things like drivers licenses, auto registration, and the like done so not immediately doing so is not evidence you have not changed residence provided you do so within the statutory period. And it's not as if one factor on its own says you haven't changed residence. Where you live is going to be the dominant factor when there are not multiple homes so sell the old home (or terminate the lease) and buy a new home (or start a new lease) and the date you move into the new home should be convincing as to when you changed residency, particularly if everything else if just paperwork (updating addresses, new DL, etc.).
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MP123
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Re: Moving to WA...when can I do Roth Conversions?

Post by MP123 »

Many states calculate taxes on part-year residents by dividing their "in state" income by their total income for the year and then using that percentage to reduce the taxes they would have paid had they been full-year residents. I'm not sure if this is the case for MD.

This can have the effect of raising the part-year income into a higher bracket because the taxes are based on a fraction of the full year's income taxes rather than just the portion that was received while a resident.

If OP is already in the highest MD bracket this probably isn't a big issue, but if not, be aware that the Roth conversion might put them into a higher MD bracket even though it took place in WA.

Edit: Just in case this isn't clear

Assume
State A income =$50k
move to State B
State B income = $50k

Part-year taxes in State A are 50% of the taxes on $100k of income. This is not necessarily the same as the taxes on $50k of income.
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Re: Moving to WA...when can I do Roth Conversions?

Post by grabiner »

MP123 wrote: Tue May 17, 2022 1:01 pm Many states calculate taxes on part-year residents by dividing their "in state" income by their total income for the year and then using that percentage to reduce the taxes they would have paid had they been full-year residents. I'm not sure if this is the case for MD.
MD doesn't prorate income for part-year residents, so your tax rate will be the full-year tax rate imposes only on your MD taxable income.

However, MD does prorate deductions. If half your income was earned while a MD resident, then you deduct half your total MD itemized deductions for the year, rather than deducting those itemized deductions which you paid while a MD resident.
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