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Wisconsin Must Adopt Federal Tax Changes for Retirement Savings Accounts

Wisconsin Must Adopt Federal Tax Changes for Retirement Savings Accounts

Last year’s budget, as I’ve detailed in countless e-updates, was chock-full of bad policies.  My update this week will not focus on something bad in the budget, and instead will report about something that wasn’t included in the budget and should have been:  language to adopt federal tax changes with regard to retirement account conversion.

In 2005, the federal government updated the tax code under the Tax Increase Prevention & Reconciliation Act.  This update permanently allows taxpayers to convert traditional IRAs to Roth IRAs, regardless of the amount of adjusted growth income, thereby allowing retirees to avoid a huge tax at retirement in exchange for giving up the yearly contribution deduction.

Because there is an immediate tax burden to converting from a traditional to a Roth, a provision was added to the 2005 legislation to encourage conversion in 2010.  This provision does away with immediate tax payment and instead allows the tax to be paid over two tax years.  However, if they’d like to do so, converters may choose to pay the tax in its entirety in 2011.  The provision also allows savers to avoid the standard 10% early withdrawal fee and the 6% annual excess IRA funding penalty.

In order for this tax incentive to be available for those couples and single filers who have an adjusted gross income of $100,000 or more per year, Wisconsin would have needed  to adopt the federal tax changes in last year’s budget.  However, Democrats failed to do so and now Wisconsin is the only state in the country that hasn’t adopted the changes.

Because of this, any Wisconsinite who converts will be subject to a 3.33% early distribution penalty and they will also most likely be subject to a 2% excess IRA funding penalty that will be assessed every year in the future as long as there is an excess in the Roth IRA.

You may ask why Wisconsin Democrats allowed Wisconsin to be the only state in the nation to ignore this tax benefit for those saving for retirement.  The answer is because they feared it might cost the general fund a few million dollars.   During the Joint Finance process Democrats received numbers indicating that the federalization might lower revenues, and instead of doing what is best for Wisconsin retirees, they did what was best for the state’s coffers.

Shortly after that, the nonpartisan Legislative Fiscal Bureau released a report showing that federalizing actually increases revenues in the state’s general fund and still saves money for Wisconsin taxpayers.  In response Republicans introduced a bill to complete the federal adoption outside the budget process.  Right after that, Democrats stole the bill and started moving it through the Legislature. Despite that fact, they still failed to get it done by the end of the year to make it easier for tax filers.

There may still be hope, as the Democrats did advance the bill out of committee this week.  If it is passes both houses and is signed by the governor, tax filers will be able to take advantage of the conversion benefit retroactively.  I am not sure what the hold- up has been, but I am hopeful that they will move quickly enough to get this done before the April 15th deadline.

The tax burden in Wisconsin is already bad enough – especially for retirees.  Failure to do this will just be adding insult to injury for many Wisconsin residents who are either close to retirement or who have been diligent savers in anticipation of pending retirement

State Representative Robin Vos State Capitol - Room 321 East - Post Office Box 8953 - Madison, Wisconsin 53708 Phone: (608) 266-9171 - Toll Free: (888) 534-0063 - Fax (608) 282-3663 Email: Rep.Vos@legis.wisconsin.gov On the Internet: Representative Vos' Web Site