In 2010, tax law changed to make it easier for couples and individuals to convert a traditional IRA into a Roth IRA. Since a traditional IRA is funded with pre-tax income and the Roth with taxed income, converting becomes a taxable event. State laws regarding taxing retirement accounts vary, so if you live in California -- or are thinking of moving -- it's wise to research the implications for your conversion.
Taxing the Conversion
California will tax the amount of money that you convert as though it were income. This amount gets added to any traditional earnings that you may have, which can put you into a higher tax bracket. You do not have to convert the entire IRA at once. If it makes more sense for you to spread the tax burden out over a few years, you can do it a little at a time.
You'll pay taxes based on your total income. The highest tax rate in California, as of the time of publication, is 9.55 percent. However if you make less than $46,766 as a single tax filer or $93,532 as a married couple filing jointly, you will pay less. Those earning and converting less than $7,124 ($14,248 as a couple) will owe no taxes on the conversion.
Moving In and Out of California
If you move into or out of California in the year that you convert your IRA, California will pro-rate the amount that you owe, based on the number of days you were living in California.
Paying the Taxes
You can pay the taxes using money from savings or other assets, or you can request that a portion of the money you're rolling over be "cashed out" to cover expenses. Note that if you do this, you may incur a 10 percent early withdrawal penalty fee. Request that the company withhold money to cover both federal and California state taxes; this is especially important if your account is based in a state that wouldn't normally withhold for state taxes.