Managing Your Money

Massachusetts taxation of a Roth IRA conversion

I converted my traditional IRA to a Roth IRA. Subsequently, I recharacterized it back to a traditional IRA due to a drop in market value. Do I have any Massachusetts tax liability?

The Massachusetts Department of Revenue (DOR) distributed “Tax Information Release (TIR) 10-8: Conversion of a Traditional IRA to a Roth IRA in 2010”. This was issued to address the significant number of IRA conversions occurring this year.

The TIR states that Massachusetts generally follows the federal rollover provisions with certain exceptions that are identified in the TIR. (The exceptions primarily relate to nondeductible IRA contributions and do not relate to recharacterizations. I will assume that you have taken a deduction in the past for all your contributions to your IRA.) The TIR specifically states:

“…any amount included as income for federal tax purposes under said section 408A by reason of such distribution shall be included in gross income” (for Massachusetts tax purposes).

Since the TIR is silent on the recharacterizations and does not identify them as an exception / adjustment, it appears that you would recognize the same amount of income on your Massachusetts return as your federal return. I suggest you read the TIR and go over your specific details with your tax preparer as I am not fully aware of your financial / tax situation and not sure if there are other exceptions / rules that could impact your situation.

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