Wisconsin may end up being the only state in the union that fails to adopt the changes in IRA conversion law made by the federal Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). The law removes the adjusted gross income limitation on people who want to convert their traditional IRAs to Roth IRAs (it was previously $100,000). Traditional IRAs allow contributions of untaxed income but disbursements on them are taxed and are required starting at age seventy and a half. Roth IRA contributions have already been taxed but do not tax disbursements and do not ever mandate them (this is significant in terms of estate planning because the money could continue to grow tax free over the lifetime of a beneficiary, unlike with traditional IRAs). It gets much more complicated than this for individual situations but in general, a person would want to convert to a Roth IRA if he or she anticipated being at a higher tax rate in the future than today.
To convert a traditional IRA to a Roth IRA, a person would be required to pay taxes on the amount they are converting (since it has not been taxed previously). That person would have the option to pay those taxes over either one or two years. But if Wisconsin does not adopt the federal law, that same person, assuming he or she has an Adjusted gross income over $100,000, would have to pay an additional early disbursement penalty of 3.3 percent on the initial conversion, and would then have to pay a 2 percent penalty on it for the current year and each subsequent year the money was actually in the Roth IRA.
Adoption of this law was originally part of Governor Doyle's budget but it was removed because the legislature was concerned about a Revenue Department report that showed Wisconsin losing a combined $3 million in 2011 and 2012 as a result of it. Since then, however, that estimate has been revised to show that the state would actually gain almost that much in revenue over those years. This revenue boost would be the result of effectively collecting the taxes on the money from the traditional IRAs (those that would be converted) over a two year time period as opposed to collecting them annually on the income that money would otherwise have been earning. At a crucial fiscal time like this, Wisconsin cannot afford to lose out on revenue.
But the state would not only be losing out on current revenue by not adopting this law. According to a poll of the Wisconsin Institute of Certified Public Accountants (CPAs), a fair portion of the CPAs will advise their clients (those with adjusted gross incomes over $100,000) to move to another state in order to make this conversion if they are set on doing it. For higher income taxpayers, the potential tax savings from a move this drastic may well be worth the hassle. If Wisconsin cannot afford lost revenue, it most certainly cannot afford to have an exodus of higher income people with retirement aspirations.
On the surface, this may not seem to be a significant issue to the typical college student. However, that is a narrow, short sighted viewpoint for two reasons. First, if Wisconsin is going to continue as a going concern, driving its higher income citizens away is not going to be a viable strategy. Second, all college students intend to graduate at some point and as young members of the work force, issues like this one will suddenly be very relevant. Something is being done about this.
State Sen. Glenn Grothman, R-West Bend, has introduced Senate Bill 416, which will bring Wisconsin up to speed on the TIPRA changes. There are already several co-sponsors from both sides of the aisle. You can help by finding out where your State Senator stands on this issue and making sure he or she knows your position on this issue. A portion of our legislature seems to have been convinced that this would go unnoticed. It is up to the people of Wisconsin to make it clear to them that this is not the case.
Ben Turpin is a junior majoring in psychology. We welcome all feedback. Please send responses to opinion@dailycardinal.com.
