IRA taxes if move from IL havng none to NC 5.75% flat

[eroscott]

TL; Dr -- strategy to deal with IRA distro taxes if move from IL having no taxes to NC having a 5.75% flat tax -- would very much appreciate any input

(Aside comment to avoid other state tangents: We realize we could move to other more tax advantage states like TN and be near the hills (App Mtns) but the Western NC seems to have much nicer communities, activities, medical, etc, options. I've visited 3 times (neighbor and son) and DW and I have visited once. Let's assume a NC move vs another state).

I am retired but wife will work a few more years while the youngest is in college and because they both have health issues so a little more time on her company health plan will be very beneficial.

Overview:
a) We currently live in IL that does not have any taxes on IRA distributions.
b) After we are both retired we are looking to move to Western NC which has a 5.75% flat state tax on IRA distributions.
c) We have 1/6th of our money in ROTH IRA 5498 Contrib which we can take out without any taxes/penalties(aftertax money in 401Ks moved to ROTHs and other ROTH IRA conversions). I verified all this showing a CPA all our 1099-Rs a few months ago.

We are trying to determine if there is a good strategy to move some money out of our ROTH IRA 5498 Contrib while we are still in IL and there are no state taxes for IRA distributions.

1) The only thought I had so far was to take out some (all?) of this ROTH money and invest it in NC bonds that are state and federal free of taxes. This would be large part of my bond part of my asset allocation.

This very old company Dupree (Fund Info / About Us) has long term and short term funds for NC. No Front or Deferred load. No Management fee. Expense ratio 0.70%. 2%-3% yield.

Long term NTFIX: NTFIX Dupree NC Tax-Free Income Fund NTFIX Quote Price News
Short/Med term NTSMX: NTSMX Dupree NC Tax-Free Short-to-Medium Fund NTSMX Quote Price News

I realized the earnings are modest (2%-3%) but this would be part of our bond asset allocation pie chart and compared to 5.75% state taxes it looks pretty good. There FAQ does bring up the point of tax equivalent yield (see 6 here - Frequently Asked Questions)

2) Any other thoughts besides tax exempt bonds? Could be a discussion on the non-bond parts of our asset allocation (stocks, etc)

 

[GrayHare]

AFAIK no state taxes Roth IRA withdrawals, so there's no state tax difference to them whether in IL or NC. OTOH tIRA withdrawals are subject to state income tax in most if not all states.

 

[eroscott]

AFAIK no state taxes Roth IRA withdrawals, so there's no state tax difference to them whether in IL or NC. OTOH tIRA withdrawals are subject to state income tax in most if not all states.

So are you saying you don't think the withdrawal from the ROTH IRA 5498 Contrib piece of the IRA would be taxed in either NC or IL?

IL Kiplinger info:
State-by-State Guide to Taxes on Retirees - Illinois
i.imgur.com/6l0btYe.png

NC Kiplinger info:
State-by-State Guide to Taxes on Retirees - North_Carolina
i.imgur.com/kVztFmq.png

 

[GrayHare]

I don't think Kiplinger is presenting that info well. Kiplinger is making no distinction between tIRA and Roth. If Roth is taxable in NC I'd be surprised. Perhaps someone from there can chime in.

 

[eroscott]

I don't think Kiplinger is presenting that info well. Kiplinger is making no distinction between tIRA and Roth. If Roth is taxable in NC I'd be surprised. Perhaps someone from there can chime in.

You may be right based on this site:
Carolina Country - Be careful when withdrawing retirement funds

Your withdrawals will be taxable
You'll owe federal income tax on the money you withdraw. (As above, this does not apply to qualified Roth IRA distributions or qualified distributions from money you've contributed to a Roth investment option of your employer-sponsored retirement plan. As far as state taxes, laws vary by state. In North Carolina, qualified Roth distributions are not taxed.)

 

[exnavynuke]

Individual Income Directive PD-98-4

Distributions

For both federal and State tax purposes, a qualified distribution from a Roth IRA is not includable in income. A distribution is a qualified distribution if it is not made within the five-year period beginning with the tax year in which the individual first contributed or rolled over amounts into the Roth IRA, and the distribution is:

made on or after the date the individual becomes 59 1/2, or
made to a beneficiary (or to the estate of the individual) after the individual dies, or
made because the taxpayer is disabled or to pay qualified first time home buyer expenses.
Because the qualified distribution is not included in federal taxable income, the taxpayer is not entitled to the retirement benefits deduction.

A nonqualifying distribution from a Roth IRA is includable in gross income to the extent the distribution represents earnings on contributions to the Roth IRA. Because the distribution is included in federal taxable income, the taxpayer is entitled to the retirement benefits deduction on the North Carolina return.

 

[eroscott]

Thanks all for any/all input. Much much appreciated.

In general before we move, I'm looking for way to take advantage of IL not having state taxes on either tIRA or ROTHs while moving to NC that has a flat state tax.

I. Converting more to ROTH may be one answer ... .
II. Transferring tIRA money to a NC bond fund maybe another? ? ? ? i.e. move some IRA money that is in one mutual fund to one of the NC mutual bond funds mentioned above. DuPree "funds are offered through a few external platforms (Fidelity, for example)..." According to #6 in their FAQ
III. ?

 

[gauss]

eroscott,

So assuming all of your IRAS are of the Roth variety:

There will be no Federal or NC on distributions assuming
- You are over age 59 1/2 when you take the distribution
AND
- Your first ROTH IRA was opened at least 5 years prior.

These are the basic conditions for a Roth IRA distribution to be considered qualified and thus not-taxable by the IRS and NC at this time.

On your second question regarding Dupree are you suggesting taking a taxable distribution from your T(raditional) IRA and then investing in Dupree in an after tax account?

Holding the Dupree bonds (or any other tax-advantaged mutual fund) within an IRA would NOT have any tax advantage if I am not mistaken.

-gauss

 

[GrayHare]

Conversion to Roth while residing in a state that does not tax tIRA withdrawals is smart if doing so does not boost your federal tax to a higher bracket.

I don't see how shifting to bonds in a tIRA would reduce your taxes. tIRA withdrawals are taxed at your ordinary income rate regardless of how any earnings were generated in the tIRA, for example even ordinarily "tax-free" municipal bond income would be taxed.

 

[eroscott]

eroscott,<snip>
On your second question regarding Dupree are you suggesting taking a taxable distribution from your T(raditional) IRA and then investing in Dupree in an after tax account?

Holding the Dupree bonds (or any other tax-advantaged mutual fund) within an IRA would NOT have any tax advantage if I am not mistaken.
-gauss

<snip>I don't see how shifting to bonds in a tIRA would reduce your taxes. tIRA withdrawals are taxed at your ordinary income rate regardless of how any earnings were generated in the tIRA, for example even ordinarily "tax-free" municipal bond income would be taxed.

Thanks you both for straightening me out on what seems obvious or clear in hindsight. I have never considered state level bond funds and I was confused on the state level taxation even on Traditional/tIRAs.

In fact, the Dupree funds are not even available within IRAs per conversation with them a few minutes ago ... because as you/they said there is no tax benefit.

 

[eroscott]

eroscott,

So assuming all of your IRAS are of the Roth variety:

There will be no Federal or NC on distributions assuming
- You are over age 59 1/2 when you take the distribution AND
- Your first ROTH IRA was opened at least 5 years prior.

These are the basic conditions for a Roth IRA distribution to be considered qualified and thus not-taxable by the IRS and NC at this time.
<snip> -gauss

I wish all our IRAs were ROTH
- We have both ROTH (32%), rollover IRAs (52%), and 16% misc (cash & P2P).
- About 70% of those rollover IRAs (52%) are set up on 72t/SEPPs to get withdrawals but no 10% penalty as both my my wife and I are 50. We have to continue the 72t/SEPPs until we are 59.5.

Let's say we move when we are 55. So according to the above bullet points (and exnavynuke's Individual Income Directive PD-98-4 text) I may need to avoid pulling money from the ROTH IRAs for 5 (4.5) yrs to not pay NC state taxes. aka wait until I'm 59.5.

It seems my best strategies is to do ROTH conversions (keeping in mind my tax bracket upper end) as long as we have money to live until we are 59.5.

Still thinking on all this. Very much appreciate the input thus far.

 

[Bamaman]

(Aside comment to avoid other state tangents: We realize we could move to other more tax advantage states like TN and be near the hills (App Mtns) but the Western NC seems to have much nicer communities, activities, medical, etc, options. I've visited 3 times (neighbor and son) and DW and I have visited once. Let's assume a NC move vs another state).

During my working years, I traveled extensively in Tennessee, Western North Carolina, Northeast Georgia and Northwestern South Carolina.

You should narrow your search for a retirement home to all of these areas, as they all have their good points. Taxes are a little high in NC, however.

The region east of Knoxville, TN is very attractive, and so are no state income taxes. Johnson City/Jonesborough has a university, medical school and has enough culture for most people. It's one of those places residents move and never leave. Morristown and Greeneville are other very popular retirement towns.

Who'd know the highest ski resorts on the East Coast are at Banner-Elk, NC--east of Johnson City? Boone is also close by with a major university. The area's full of second homes and even high rise condos on the mountain tops. And needless to say that Asheville is a premier foodie/restaurant town in a little larger town.

West and north of Greenville, SC are some incredible towns where the mountains and the lakes come together. Clemson University is in the middle. The mountains have places like Highlands/Cashiers (NC) and it's home to a bunch of very plush golf/equestrian communities. Gary Player liked it so much he moved his whole golf course architect operation there. NW SC has a booming economy and is a great society.

Northeast Georgia is where we keep our mountain place--outside Helen, GA. The mountains are 4500' high, with the Appalachian Trail on top. Up on the North Carolina border are incredible mountain towns of Ellijay, Blue Ridge, Blairsville, Hiawassee and Clayton--with 4 major lakes in the area. We especially like Hiawassee which is on islands in the middle of Chatuge Lake. There are great roads into Atlanta 90 minutes away.

Any of the above cities/regions have good medical facilities within 1/2 hour, plenty of culture, incredible beauty and a simple lifestyle. And homes are in all price ranges throughout the region. And it's considered a low cost of living region that has it all.

 

[eroscott]

Appreciated everyones input. We realize that contributing to ROTHs (and/or converting some tIRAs up to marginal tax rate) with some of our 72t/SEPP money that we don't entirely need with DW still working could be helpful if we move to NC.

During my working years, I traveled extensively in Tennessee, Western North Carolina, Northeast Georgia and Northwestern South Carolina.

You should narrow your search for a retirement home to all of these areas, as they all have their good points. Taxes are a little high in NC, however.

The region east of Knoxville, TN is very attractive, and so are no state income taxes. Johnson City/Jonesborough has a university, medical school and has enough culture for most people. It's one of those places residents move and never leave. Morristown and Greeneville are other very popular retirement towns.

Who'd know the highest ski resorts on the East Coast are at Banner-Elk, NC--east of Johnson City? Boone is also close by with a major university. The area's full of second homes and even high rise condos on the mountain tops. And needless to say that Asheville is a premier foodie/restaurant town in a little larger town.

West and north of Greenville, SC are some incredible towns where the mountains and the lakes come together. Clemson University is in the middle. The mountains have places like Highlands/Cashiers (NC) and it's home to a bunch of very plush golf/equestrian communities. Gary Player liked it so much he moved his whole golf course architect operation there. NW SC has a booming economy and is a great society.

Northeast Georgia is where we keep our mountain place--outside Helen, GA. The mountains are 4500' high, with the Appalachian Trail on top. Up on the North Carolina border are incredible mountain towns of Ellijay, Blue Ridge, Blairsville, Hiawassee and Clayton--with 4 major lakes in the area. We especially like Hiawassee which is on islands in the middle of Chatuge Lake. There are great roads into Atlanta 90 minutes away.

Any of the above cities/regions have good medical facilities within 1/2 hour, plenty of culture, incredible beauty and a simple lifestyle. And homes are in all price ranges throughout the region. And it's considered a low cost of living region that has it all.

My sincere thanks for taking the time to share your experienced input on the area. Certainly gave us some more things to consider and I've been looking more closely at TN again. Forgot about Johnson City! We have a kid in KY so being within an easy days drive is fairly important.