Roth Conversion- 2 Payment Plan- State Doesn't Accept?

[zeros]

What if you have a Roth conversion and elect the 2 year plan to pay the taxes and your state doesn't go along with this? Do we have a real mess on our hands?

[OtisMozzetti]

What if you have a Roth conversion and elect the 2 year plan to pay the taxes and your state doesn't go along with this? Do we have a real mess on our hands?

As messes go, it doesn't sound that bad. Both federal and all states seem to conform with the occurrence of a Roth conversion. Upon conversion, some taxable income results. Fed says that the taxpayer may elect to spread that taxable income among the following two tax years, 2011 and 2012. If a state "doesn't go along", that would seem to mean that all the taxable income from the conversion will be recognized during 2010 for state purposes.

For example, if California did not conform with the 2 year plan, then there would be an adjustment (an addition) of 100% of the conversion income during 2010; an adjustment (a subtraction) of 50% of the income during 2011; and an adjustment (a subtraction) of 50% of the income during 2012. It doesn't sound so bad, or am I missing something about your question?

EA in California

[Jesse]

It depends on the state. If the state does not follow you could end up with a mess.
Wisconsin has accepted the Federal law for the conversion of IRA, SEP,or SIMPLE but has not for conversion of 401(k)'s or 403(b) plans.

Therefore it is my understanding that if a 401(k) or 403(b) plan is converted it will be fully taxed in 2010 and penalties will apply, such as the 3.33% early distribution penalty and/or excess contribution penalties.