However, once the conversion is complete, the earnings on that converted amount grow tax-free. In some jurisdictions, you may owe state income tax on earnings even if the federal government allows the tax-free withdrawal.
Roth IRA State Non Conformity: When Your State Taxes Earnings
Each contribution you make starts its own 5-year clock, but the clock for earnings usually begins on January 1 of the tax year for which the contribution was made. However, the growth is tax-deferred, meaning you will pay ordinary income tax on every withdrawal in retirement.
While most states align with federal tax treatment and offer tax-free growth, a few states do not. This uninterrupted compounding is significantly different from a taxable brokerage account, where taxes are due annually on gains, potentially slowing down the growth of your principal.
Roth IRA State Non Conformity: When Your Earnings Face State Taxes
Understanding this timeline is vital to ensure you do not accidentally trigger taxes and penalties on investment gains. These exceptions allow you to withdraw earnings without the 10% early withdrawal penalty, though they may still be subject to income tax depending on the specific circumstances.
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