The 1996 Law That Stops California From Taxing Your Pension After You Move Does Nothing for a Roth Conversion Done the Year Before You Leave. Convert a $1 Million IRA in Reno Instead of Sacramento and Keep Roughly $100,000
A federal law passed in 1996 shields retirees from state taxes on pension income the moment they leave, but one common pre-move financial decision falls completely outside its protection, and the calendar date you choose determines who collects six figures.
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Picture a 64-year-old single retiree in Sacramento. She’s a composite, built to show the math. She has $1 million in a traditional IRA and a condo in Reno already under contract for next spring. Her plan is to convert the whole IRA to a Roth this December, so the tax bill is paid before she moves.
That timing costs her about $103,837 in California income tax. If she waits until she lives in Nevada and converts from Reno, California gets nothing. Her IRA is the same and her federal bill is the same. About $100,000 rides on which side of the state line she lives on when the money moves.
A 1996 Federal Law Protects Retirees Only After They Leave
The rule at work is 4 U.S.C. Section 114, which Congress added through Public Law 104-95 on January 10, 1996. It says simply that “No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State.” The law covers 401(k)s, 403(b)s, 457 plans, government pensions and individual retirement plans described in section 7701(a)(37), which means IRAs.
The law ended the “source taxes” some states used to bill former workers on pensions they earned while living there. It has one big limit: it protects only nonresidents. A Roth conversion counts as an IRA distribution, and you report it as income on your return for the year that you converted. If you convert while you still live in California, every dollar is taxed as California resident income. Section 114 doesn’t apply to it.
How California Claims $103,837 of a $1 Million Conversion
Assumptions: single filer, California’s 2025 rate schedule (the latest one published), and other income that about cancels out her deductions, so the conversion leaves her with $1,000,000 of California taxable income.
| California bracket (2025, single) | Rate | Tax |
|---|---|---|
| $0 to $72,724 | 1% to 8% | $3,202 |
| $72,724 to $371,479 | 9.3% | $27,784 |
| $371,479 to $445,771 | 10.3% | $7,652 |
| $445,771 to $742,953 | 11.3% | $33,582 |
| $742,953 to $1,000,000 | 12.3% | $31,617 |
| Total | 10.4% effective | $103,837 |
Any dollar above $1 million also picks up California’s extra 1% Mental Health Services Tax, which takes the top rate to 13.3%. Nevada has no personal income tax, so the same conversion done from Reno owes the state $0.
The federal bill is identical in both cities. For 2025, a single filer pays 37% on taxable income above $626,351, and a $1 million conversion pushes plenty of dollars past that line. Moving can’t reduce that part.
A December Conversion Can’t Be Undone
The old safety valve is gone. Conversions made in 2018 or later can’t be recharacterized, so a conversion done in Sacramento in December stays done. You report it on Form 8606 and may need to increase your withholding or make estimated tax payments.
Age matters too. You can’t convert money you’re required to withdraw, including in the calendar year you reach age 73. Waiting a few months for the move costs nothing for someone in their early 60s. Waiting past 73 means taking each year’s required distribution before converting the rest.
Three Moves That Keep $100,000 in Your Roth
- Move first, then convert. In the year you move, you file California’s part-year resident return (Form 540NR). California taxes the income you received while you lived there. A conversion dated after you become a Nevada resident falls under Section 114.
- Build a residence paper trail. California’s Franchise Tax Board audits just this pattern: a large chunk of income soon after a move out of state. Get a Nevada driver’s license, register to vote there, sell or rent out the California house, and keep a log of the days you spend in each state. Keeping the Sacramento home and spending winters there gives auditors an opening.
- Spread the conversion over your Nevada years. Doing all $1 million in one year runs straight into the 37% bracket. Medicare also sets premiums from your income two years earlier, so a single big year raises your IRMAA surcharges two years later. Smaller annual conversions from Reno can keep more of the money in lower federal brackets (those quiet years between your last paycheck and your first RMD are the whole subject of our free Roth conversion guide).
The move pays off in everyday costs, too. The Bureau of Economic Analysis puts California’s cost-of-living index at 110.72, the highest in the country, against 99.979 for Nevada.
The date your custodian processes the conversion decides who collects. Before you sign anything, run the timing, residence and bracket math with a CPA or fiduciary advisor.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
