The Roth IRA in North Carolina

North Carolina taxes a Roth conversion at a flat 3.99% for tax year 2026. And it is the only state of the nine this series has covered so far whose rates for the next seven years are already written into statute: 3.49% for 2027–2029, 3.24% for 2030–2032, 2.99% after 2032. Waiting has a price schedule — and the schedule is enacted law, not a projection.

This is the ninth state guide in the series, and North Carolina is the first of the nine so far whose central fact had to be rewritten between research and publication. Our file was originally built around a revenue-trigger regime — future cuts contingent on collections, tested year by year — and hours after we confirmed that regime against the state’s own published statute text, a second sweep caught the budget that had struck it a month earlier. S.L. 2026-41, ratified July 2 and approved July 7, 2026, replaced the triggers with fixed rates through 2032 and beyond. The full sequence, including why the state’s online statute page still shows the old law, is below.

Run the arithmetic across the schedule and the state layer prices itself. A $100,000 conversion costs $3,990 in 2026, $3,490 in any of 2027 through 2029, $3,240 in 2030 through 2032, and $2,990 after that — each figure enacted, none contingent. No North Carolina city or county can add anything: local governments may tax only as the General Assembly specifically authorizes (G.S. §160A-206(a) for cities, §153A-146(a) for counties), and no act authorizes a local income tax. The year-to-year gap is real money but modest — waiting from 2026 to 2027 saves $500 per $100,000 at the state layer — and the federal side, brackets and IRMAA above all, will usually dominate a multi-year plan. What the schedule changes is certainty: unlike Ohio, one state back in this series, whose phase-down is simply finished, and unlike Georgia, whose future cuts hang on annual revenue certifications, North Carolina hands a planner a declining rate table with the force of statute.

North Carolina Roth report card

The same thirteen dimensions score every state in this series. Each verdict traces to the dataset at the end of this page; the workbook carries the identical card with its authorities.

The seven-year glide path, and the budget that made it law

North Carolina has run a flat individual income tax since 2014, and the modern story is a long step-down. S.L. 2021-180, the November 2021 budget act, wrote a schedule into G.S. §105-153.7(a) that took the rate from 4.99% for tax year 2022 to 4.75% for 2023, 4.5% for 2024 and 4.25% for 2025 — each of those figures is history, correct for its own return year and wrong for every other. S.L. 2023-134 then overlaid a trigger regime on the out-years: beginning with fiscal year 2025–26, if General Fund revenue beat a listed amount, the rate for the indicated tax year fell by half a percentage point automatically, down to a 2.49% floor, with the test keyed to the State Controller’s final accounting each August. That was the law our research first confirmed.

The 2026 budget ended that regime before its first test ever ran. S.L. 2026-41 — the Current Operations Appropriations Act of 2026, Senate Bill 257, ratified July 2 and approved July 7, 2026 — rewrote G.S. §105-153.7 in section 44.1(a). The trigger rows for fiscal years 2025–26 through 2032–33 are struck, visibly lined through on page 607 of the session-law PDF, and in their place stands a fixed schedule: 3.99% in 2026; 3.49% in 2027, 2028 and 2029; 3.24% in 2030 through 2032; 2.99% after 2032. Triggers survive only at the far end of the schedule: from fiscal year 2033–34 (a $40.258 billion test, affecting tax year 2035), with the decrement halved to 0.25 percentage points, the 2.49% floor retained, and the same test — the Controller’s final August accounting of General Fund revenue — so the first accounting that can move a rate arrives in August 2034.

We tell that sequence in detail because our own research initially got it wrong, and the way it got it wrong is a caution for anyone checking this page against official sources. The first pass built the 2027 story on the trigger regime and verified it — verbatim — against ncleg.gov’s posted text of G.S. §105-153.7, which still showed the pre-budget law. A later sweep of the July session laws caught S.L. 2026-41, enacted a month before our research date. As of early August 2026, the General Assembly’s online statute page for §105-153.7 has still not been recodified to the amended text, and the Department of Revenue’s Tax Rate Schedules page carries the 2026 rate but none of the out-year steps. For anything after tax year 2026, the session law itself is the citation — nothing else is current yet.

Rate verified as of 2026-08-07

Every row is enacted law — G.S. §105-153.7 as rewritten by S.L. 2026-41 §44.1(a). A later legislature can always amend a statute, but nothing here is contingent on revenue.

The contrast inside this series is the point. Georgia’s future cuts hinge on revenue tests certified each December — real, but unknowable in advance. Ohio’s phase-down is complete: one rate, no schedule left. North Carolina alone, of the nine states covered so far, publishes tomorrow’s rates as statute: the state cost of the same conversion falls by a quarter over seven years on a schedule you can put in a spreadsheet today. That is a planning fact, not a recommendation. Mechanically, it argues against front-loading conversions for state-tax reasons alone — every year of the schedule is cheaper than the one before it — while the federal layer still swings far more per decision than the $250 to $500 per $100,000 that separates adjacent steps here.

Authority: G.S. §105-153.7 as rewritten by S.L. 2026-41 §44.1(a) (S257, ratified 7/2/2026, approved 7/7/2026, trigger-row strikethrough at p. 607); S.L. 2021-180 §42.1 (step-down history); S.L. 2023-134 §42.1(a) (superseded trigger regime); NCDOR Tax Rate Schedules page (TY2026 rate only)

Federal AGI in, one flat rate out: nothing on the NC return removes conversion income

The mechanics are as short as any state in this series. G.S. §105-153.4(a) defines a resident’s North Carolina taxable income as federal adjusted gross income, as modified by §§105-153.5 and 105-153.6. A Roth conversion enters federal AGI under IRC §408A(d)(3) and flows straight through; a qualified Roth withdrawal never enters federal AGI under IRC §408A(d)(1) and therefore never reaches the North Carolina return at all — we read the additions list in §105-153.5(c) in full, and no item pulls a Roth distribution back in. Between those two ends there is nothing to elect: North Carolina offers no installment spread for conversion income, no recapture rule, and no age- or dollar-gated retirement exclusion of the Georgia kind. The deduction list in §105-153.5(b) contains exactly three retirement items — Social Security and Railroad Retirement benefits at (b)(3), Bailey settlement benefits at (b)(5), and uniformed-services retirement pay at (b)(5a) — and none of them removes conversion income for a private-sector saver.

The one exception cuts both ways, and it belongs to a closed cohort. A conversion made directly out of a Bailey-qualifying government plan is deductible on the North Carolina return under NCDOR Directive PD-14-1 — but Bailey benefits rolled into a traditional IRA first lose their character permanently, and a later conversion of that IRA is fully taxable. The sequencing, the 1989 vesting date and the directive trail get their own section further down this page.

What shields the first dollars is the standard deduction, and only that. G.S. §105-153.5(a)(1) sets $12,750 for single and married-filing-separately filers, $25,500 for joint filers and $19,125 for heads of household — statutory amounts, not indexed, unchanged for 2026. North Carolina has no personal exemptions, eliminated in the 2014 flat-tax restructuring, and — as the Department of Revenue states expressly — no additional standard deduction for taxpayers 65 or older or blind: the federal age add-on has no NC counterpart. So the worked example is one line. A retired couple whose only 2026 income is a $100,000 conversion pays 3.99% of $74,500 — about $2,973. A converter whose other income already fills the standard deduction pays exactly $3,990 on the same conversion, computed in one step, with no surcharge and no high-income recapture.

Authority: G.S. §105-153.4(a); §105-153.5(a)(1), (b)(3), (b)(5), (b)(5a), (c); IRC §408A(d)(1), (d)(3); NCDOR Directive PD-14-1; NCDOR standard deduction page

Paying as you go: a prior-year safe harbor with no 110% tier, and interest instead of a penalty

North Carolina expects estimated payments (Form NC-40) once the balance due after withholding and credits reaches $1,000 — a threshold now written directly into G.S. §105-163.15(f) — on the familiar dates: April 15, June 15 and September 15, 2026, and January 15, 2027, with the final installment waived if the return is filed and paid by January 31. The safe harbor is the smaller of 90% of the current year’s tax or 100% of the prior year’s (the prior-year return must cover twelve months) — and unlike federal §6654, there is no 110% tier for high incomes. That omission matters most in exactly the conversion case: however large the 2026 conversion, paying 100% of the smaller 2025 liability in even installments covers it. Underpayment costs interest, not a penalty — computed on Form D-422 at a rate set semiannually under G.S. §105-241.21; the 2025 form carries 7%.

A December conversion meets the usual installment question: were April, June and September underpaid the moment the conversion happened? The default required installments are 25% per quarter, so an uncovered late-year conversion accrues interest back to the earlier due dates. There are three exits. The prior-year harbor, paid evenly from April. The annualized-income method on Form D-422A, which computes each installment from income actually received by that point in the year — with the rule that if you annualize one period you must annualize them all. Or withholding, which the form deems paid one-fourth on each due date unless the taxpayer shows otherwise — so state tax withheld from a December IRA distribution retroactively covers all four installments, the same trick the federal rules allow. Which raises the question of what North Carolina withholding on an IRA distribution actually looks like — and there the statute holds a surprise.

Authority: G.S. §105-163.15(f) (threshold codified by S.L. 2026-31 §1.11); Form NC-40; Form D-422 (2025, Web 12-25) and Form D-422A; G.S. §105-241.21

The 4% withholding default: statutory, opt-out, and no longer equal to the tax

North Carolina withholding on IRA money is opt-out, not opt-in. Under G.S. §105-163.2A, any pension payer required to withhold federal tax under IRC §3405 must withhold North Carolina tax too, and for a nonperiodic distribution the statute commands a flat 4%. Form NC-4P applies that squarely to conversions: distributions from an IRA that are payable on demand are treated as nonperiodic, and a traditional-to-Roth conversion is an IRA distribution — so absent an election, the custodian must send 4% of it to the Department of Revenue. Note what that 4% is: a figure written into the statute itself, not a mirror of the income tax. It does not track the 3.99% rate — the rate fell below it in 2026, so default withholding now over-collects — and neither of the 2026 tax acts amended §105-163.2A; unless a future session does, the gap only widens as the enacted schedule steps down.

The cash-flow trap is federal, not state. On a $50,000 conversion with the default in place, $2,000 goes to Raleigh instead of the Roth — and federally, that withheld slice is a distribution that never got converted: taxable as ordinary income and, for a converter under 59½, exposed to the 10% early-distribution tax on top. The escape is the checkbox on Line 1 of Form NC-4P, electing no withholding. But the election runs distribution by distribution, so a serial converter renews it each time, and a missing or incorrect Social Security number voids it — the 4% then applies regardless. The form’s no-opt-out rule for eligible rollover distributions does not reach this transaction: an IRA distribution is never an eligible rollover distribution, so the opt-out stands. Two housekeeping notes close the loop. The posted NC-4P is a 2020 revision — its operative rules are current, but its worksheet dollar figures are not. And the form singles out one group by name: government retirees whose benefits the Bailey settlement removes from North Carolina tax are directed to choose no withholding on Line 1.

Authority: G.S. §105-163.2A; Form NC-4P (Web 9-20 revision); IRC §3405

One date in 1989 split North Carolina’s public retirees in two

North Carolina’s headline Roth story is not the flat rate. It is a 1998 court settlement. In Bailey v. State, 348 N.C. 130 (1998), the State settled litigation over its taxation of government retirement benefits, and the settlement’s terms still bind: North Carolina cannot tax retirement plan benefits paid from North Carolina state and local government plans or from federal plans — military pensions and the Thrift Savings Plan included — to anyone who had five or more years of creditable service as of August 12, 1989. The rules live in a series of NCDOR directives (PD-99-1 through PD-14-1, the last of which does the work on this page), and the benefit is claimed as a deduction on Form D-400 Schedule S under G.S. §105-153.5(b)(5).

The covered plans are the ones that employ most of the state’s public workforce: the Teachers’ and State Employees’ Retirement System (TSERS), the Local Governmental Employees’ Retirement System (LGERS), the Consolidated Judicial Retirement System, and the federal CSRS and FERS. For the state’s own defined-contribution plans — the NC 401(k) and NC 457 — the vesting test is different in form and identical in spirit: the employee must have contributed or contracted to contribute to the plan before August 12, 1989. Either way the date is frozen. No one can newly qualify, ever.

What makes Bailey more than a pension footnote is the shape of the exemption. NCDOR’s directive PD-04-1 replaced an earlier proportionate-tracing approach with a rule of startling breadth, restated verbatim on the Department’s current Bailey page: “All distributions from a qualifying Bailey retirement account in which the employee/retiree was ‘vested’ as of August 12, 1989, are exempt from state income tax regardless of the source of the funds contained in the account.” The account is a container, not a ledger. Whatever sits inside a qualifying account — original contributions, decades of earnings, even money rolled in from somewhere else — comes out of it free of North Carolina income tax.

The settlement date built a two-class system and time is shrinking one of the classes. A teacher hired in 1984 and a colleague hired in 1990 can retire from the same district with the same TSERS pension; the first collects it free of North Carolina tax for life, the second pays the flat rate — 3.99% for 2026 — on every dollar of the identical benefit. Qualifying through the NC 401(k)/457 contribution test means the member was contributing by 1989, at least 37 years ago; qualifying through the five-year pension test means service began by August 1984. The exemption attaches to each retiree’s own vesting — a Bailey-vested spouse’s deduction does not transfer to the other spouse’s accounts — though beneficiaries of a vested retiree are covered, and the deduction stacks without limit alongside the Social Security and military-retirement deductions.

Authority: Bailey v. State, 348 N.C. 130 (1998) (settlement); N.C.G.S. §105-153.5(b)(5); NCDOR Bailey Decision filing-topic page (TY2025 vintage); NCDOR Directives PD-04-1, PD-14-1

Convert straight from the plan, and North Carolina taxes none of it

In 2014 the Department answered the Roth conversion question by name, and the answer is the single most valuable sentence on this page. Directive PD-14-1 (February 26, 2014): “If the rollover to a Roth account is from a qualifying tax-exempt Bailey retirement account, the rollover distribution is exempt from state income tax and deductible on the state return to the extent the rollover distribution was included as income on the taxpayer’s federal income tax return.” Read it twice, because it says two things. The conversion is federally taxable in full — that is what a conversion is — and the same dollars are then deducted in full on the North Carolina return. Federal tax applies. North Carolina tax is zero.

The arithmetic makes the class divide concrete. A private-sector North Carolinian converting $100,000 in 2026 owes the state $3,990 at the flat 3.99%. A Bailey-vested member converting the same $100,000 directly from the qualifying account — the NC 401(k), the NC 457, a TSP balance, any qualifying plan — owes $0, at any conversion size, with no cap and no phase-out. North Carolina is the only one of the nine states covered so far in this series where a defined class of savers can execute a Roth conversion entirely free of state income tax while still resident.

The return mechanics are ordinary, which is part of the appeal. The deduction is claimed in the conversion year on Line 20 of the 2025 D-400 Schedule S — the line captioned for retirement benefits received by vested state, local and federal government retirees — to the extent the conversion landed in federal income, with a copy of the payer’s Form 1099-R attached to the return to support it. (Schedule S line numbers shift from year to year; 2025 is the current form vintage.) NCDOR prescribes no particular 1099-R distribution code: a direct plan-to-Roth-IRA conversion typically arrives coded G with the taxable amount in box 2a, and what the Department wants is the attached 1099-R showing the qualifying Bailey plan as payer.

One piece of paper prevents a pointless detour through the refund cycle. Where federal withholding applies, North Carolina’s default withholding on a nonperiodic distribution is a flat 4% fixed by statute (G.S. §105-163.2A) — a statutory figure that does not track the 3.99% income-tax rate — and it would otherwise be taken from a conversion that owes North Carolina nothing. Form NC-4P singles the cohort out in its own instructions: “IMPORTANT. Government retirees whose income is exempt from State tax as a result of the Bailey Settlement should choose no withholding by checking the box on Line 1 of Form NC-4P.” File the election with the payer before converting; tax withheld from an exempt conversion comes back only after the return is filed. And the election is not evergreen: it applies distribution by distribution, so a member converting a large balance in stages across several years renews the Line 1 election with each conversion, not once.

Note precisely what PD-14-1 protects: the conversion, not the destination. A Roth IRA is never itself a Bailey account. For qualified Roth IRA withdrawals that distinction is moot — they are excluded from federal AGI, North Carolina’s starting point, so the state never sees them regardless of Bailey status. For nonqualified withdrawals of post-conversion earnings, the federally taxable portion would flow into North Carolina income with no Bailey deduction to meet it. That last limb is our synthesis of PD-04-1 and PD-14-1 together; no published NCDOR guidance addresses post-conversion Roth IRA earnings expressly.

Authority: NCDOR Directive PD-14-1 (Feb. 26, 2014); NCDOR Bailey Decision filing-topic page; Form D-400 Schedule S (2025), Line 20; Form NC-4P and instructions; N.C.G.S. §105-163.2A; N.C.G.S. §105-153.7(a) as rewritten by S.L. 2026-41 §44.1(a) (3.99% for 2026)

One rollover kills it forever

The same guidance that creates the conversion exemption destroys it for anyone who touches an IRA first, and the two rules must be read in the same breath. NCDOR: “qualifying tax-exempt Bailey benefits rolled over into another retirement plan lose their character and would not be exempt upon distributions from the other plan unless that plan is a qualifying Bailey retirement account in which the employee was vested as of August 12, 1989.” No traditional or Roth IRA can ever be a qualifying Bailey account — Bailey covers government employer plans, and no one was “vested” in a private IRA on August 12, 1989 for these purposes. The character loss is permanent: there is no cure, no tracing, no rolling the money back.

The trap catches exactly the person the exemption was built for. A Bailey-vested federal retiree rolls a TSP balance into a private IRA at retirement — for the fund menu, for consolidation, because an advisor suggested it — and that single administrative transfer converts North-Carolina-tax-free money into North-Carolina-taxable money for life. Every later withdrawal from the rollover IRA is fully taxable to the state, and a later Roth conversion of that IRA is taxed like anyone else’s: $3,990 per $100,000 at the 2026 rate. The identical conversion executed a step earlier, directly from the TSP, would have cost North Carolina nothing.

So the sequencing is the entire game. From the same Bailey-vested account, two orderings of the same two ideas — “get to a Roth” and “leave the plan” — produce opposite permanent outcomes. Convert from the plan to a Roth IRA first, and the conversion is NC-free under PD-14-1; what sits in the Roth IRA afterward is protected from North Carolina by federal AGI conformity, forever, for qualified withdrawals. Roll to a traditional IRA first, and the exemption dies at the rollover; the eventual conversion — of the very same dollars — is fully state-taxable, and so is every unconverted IRA withdrawal after it.

The asymmetry runs the other way with equal force, and it is worth stating because it is the same rule. Under PD-04-1’s any-source language, money rolled into a qualifying Bailey account takes on the account’s exempt character — all distributions are exempt “regardless of the source of the funds contained in the account.” The door swings inward generously and outward fatally: non-Bailey money that enters a qualifying account becomes exempt, and Bailey money that leaves for a non-Bailey plan loses its exemption. Every dollar a vested member controls is on one side of that door or the other, and only the member’s paperwork decides which.

Authority: NCDOR Directives PD-03-1, PD-04-1, as restated in PD-14-1; NCDOR Bailey Decision filing-topic page (rollover-character and any-source rules quoted verbatim)

Does Bailey cover an in-plan Roth conversion? Almost certainly — and no guidance says so

A 2025 plan change made this question suddenly practical. The NC Supplemental Retirement Board of Trustees had long allowed in-plan Roth conversions only for withdrawal-eligible funds; by resolution adopted August 21, 2025, it opened the gate: “The Board hereby adopts In-Plan Roth Conversions for all pre-tax account balances in the NC 401(k) and NC 457 Plans and directs the Department to amend the plan documents… as necessary.” The Board’s own memo describes the mechanism as “in effect, rolling over funds from a pre-tax account to a Roth account within the same plan.” A Bailey-vested member can now convert any pre-tax dollar to Roth without the money ever leaving the qualifying plan.

For that member, the state-tax logic looks even cleaner than the PD-14-1 route: the conversion is a distribution from — and back into — the same qualifying Bailey account, and the Department’s rule is that all distributions from a qualifying account are exempt regardless of the source of the funds. The conversion income should be deductible on the Bailey line exactly like a direct-to-Roth-IRA conversion. But the honest grade is a notch below certain: NCDOR’s published guidance nowhere names in-plan conversions. Its Roth-rollover example is the rollover “into Roth IRA’s,” drafted in an era before in-plan conversions existed, and the in-plan variant has not been addressed by name in any directive, bulletin or form instruction since. The inference is strong; it is still an inference.

The downstream mechanics carry the same one-notch hedge. Qualified distributions from the plan’s Roth balance never reach North Carolina at all — they are excluded from federal AGI, so Bailey adds nothing. Nonqualified plan-Roth distributions — the federally taxable earnings slice — are still distributions from a qualifying Bailey account, and the any-source rule should exempt them, though no guidance says that by name either. And a retiree who later rolls the plan’s Roth balance out to a Roth IRA forfeits Bailey character at that rollover — but what is actually lost is narrow: only nonqualified Roth IRA earnings withdrawals would face state tax that the plan would have shielded. A member who satisfies the federal qualification rules before touching earnings gives up nothing North Carolina can reach.

Authority: NC Supplemental Retirement Board of Trustees resolution, Aug. 21, 2025 (myncretirement.gov board memo); NCDOR Bailey Decision filing-topic page; N.C.G.S. §105-153.4(a). The in-plan and plan-Roth-earnings conclusions are inferences from the any-source rule, not published guidance.

The military deduction is broader — and it stops at the plan’s edge

Military retirees get a second exemption with no 1989 birthmark. G.S. §105-153.5(b)(5a), added by S.L. 2021-180 §42.1A and effective from tax year 2021, deducts “retirement pay for service in the uniformed services of the United States to a retired member” who either served at least 20 years or was medically retired under 10 U.S.C. Chapter 61 — plus Survivor Benefit Plan payments to such a retiree’s beneficiaries. No August 12, 1989 vesting, no service-start cutoff: a soldier who enlisted in 2005 and retires in 2025 collects military retirement pay free of North Carolina tax.

But the statute’s words are “retirement pay,” and the words are the limit. A TSP distribution is not retirement pay; neither is a distribution from an IRA that once received a military-plan rollover. The deduction does not follow money into an account — the TSP stays NC-exempt only through Bailey, only for the pre-1989-vested cohort, and that exemption dies at an IRA rollover like any other Bailey benefit. Nor can the military deduction ever make a conversion NC-free: a pension has no rollover-eligible balance to convert. Its real effect on the Roth arithmetic is indirect — it makes the pension itself state-tax-free, which lowers a military retiree’s marginal need for Roth dollars in North Carolina at all.

Authority: N.C.G.S. §105-153.5(b)(5a) (S.L. 2021-180 §42.1A, eff. TY2021); NCDOR Important Notice on the military retirement deduction (Nov. 2021, updated Aug. 2022); NCDOR Bailey Decision filing-topic page

Choosing Roth costs $977.55 going in — and that is the whole bill

North Carolina prices the pre-tax-versus-Roth choice in one line — the simplest contribution story of the nine states this series has covered so far. The state starts an individual return from federal adjusted gross income: N.C.G.S. §105-153.4(a) defines North Carolina taxable income as the taxpayer’s AGI as modified by §§105-153.5 and 105-153.6, and nothing in the modification lists touches elective deferrals or IRA contributions in either direction. The federal treatment flows straight through. A pre-tax 401(k) deferral is excluded from federal AGI and never enters the North Carolina base at all, while a designated Roth deferral or a Roth IRA contribution comes from income taxed at the 2026 flat rate of 3.99% (§105-153.7(a), as rewritten by S.L. 2026-41). On the full 2026 elective-deferral limit of $24,500, choosing Roth costs $977.55 of state tax the pre-tax chooser defers; on a full $7,500 Roth IRA contribution, $299.25.

There is no second line to check. No North Carolina city or county levies an income tax — a statement worth phrasing precisely, because it rests on a statutory structure plus a verified absence, not a constitutional prohibition. A city “shall have power to impose taxes only as specifically authorized by act of the General Assembly” (N.C.G.S. §160A-206(a)), a county the same (§153A-146(a)), and the General Assembly has authorized local property taxes, local-option sales taxes and occupancy taxes — never a local income tax. So no municipality or county imposes one, and Form D-400 has no local tax line. Where Ohio ran the identical deferral decision through three layers — state, municipality, school district — North Carolina has exactly one, and $977.55 is the entire state-and-local bill.

The IRA choice inherits the same flow-through. A traditional IRA contribution that is deductible federally reduces federal AGI and cuts North Carolina tax automatically — $299.25 on a full $7,500 — because §105-153.5 adds no state-specific IRA deduction and no addback of the federal one. The flip side: a saver whose federal deduction is phased out by workplace-plan coverage gets no state relief either, and a nondeductible traditional contribution is state-taxed going in exactly like a Roth contribution, without the Roth’s tax-free exit. Whether the deduction survives at all is federal law; North Carolina simply inherits the result.

Authority: N.C.G.S. §105-153.4(a); §105-153.5(b); §105-153.7(a), as rewritten by S.L. 2026-41 §44.1(a); §160A-206(a); §153A-146(a); 2025 Form D-400

The $38,800 line: three property-tax programs, one hard cliff

North Carolina’s cliff lives on the property-tax bill. Three relief programs share a single application — Form AV-9, due June 1 — and an owner may benefit from only one of them in a given year. Two of the three are income-tested, and for 2026 they are tested against the same number: $38,800. The limit indexes annually to the Social Security COLA, rounded to the nearest $100 (§105-277.1(a2)), with the Department of Revenue announcing each year’s figure by July 1.

The workhorse is the elderly or disabled exclusion (§105-277.1). It removes the greater of $25,000 or 50% of the appraised value of the permanent residence — the dwelling plus up to an acre — from the tax base, for an owner who is 65 or older or totally and permanently disabled and whose income for the preceding calendar year did not exceed the limit. For married applicants living together, both spouses’ income counts regardless of whose name is on the deed. Once granted, the exclusion continues without annual reapplication.

The test is a hard cliff with a one-year lag. Eligibility for the 2026 tax year is measured on calendar-2025 income, so a $40,000 Roth conversion in 2025 — by itself, before a dollar of other income — exceeds the $38,800 limit and forfeits the entire exclusion for 2026. There is no phase-out and no partial benefit: one dollar over loses everything, and requalification waits until income falls back under the limit for a full calendar year. The money at stake is real, though it varies by county and city millage: on a $300,000 home the exclusion removes $150,000 from the base, and at combined rates of roughly $0.70 to $1.00 per $100 of value that is about $1,050 to $1,500 a year — computed illustrations from the exclusion amount and typical rates, not published figures.

The second income-tested program is the one to read twice. The circuit breaker (§105-277.1B) is a deferral, not a forgiveness. For an owner 65 or older or disabled, with five consecutive years of ownership and five years of occupancy, it caps the current bill at 4% of income when income is at or under $38,800, or 5% when income falls between $38,800 and 150% of the limit — $58,200 for 2026. Everything above the cap is deferred and becomes a lien on the home (§105-355(a)), and at a disqualifying event — death, transfer, or ceasing to use the home as the permanent residence — the deferred taxes for the preceding three fiscal years come due with interest, accruing as if they had been payable all along. Unlike the exclusion, the circuit breaker demands a new application every single year — the AV-9 says so in capital letters — and every non-spouse co-owner must qualify and elect, or nobody benefits. One conversion-relevant mercy is written into the statute: under the gap-in-deferral rule (§105-277.1B(j)), a year in which income jumps over the line does not call the accumulated lien. The deferred taxes carry forward to the eventual disqualifying event, non-qualifying years are disregarded in counting the three that come due, and the county tax collector must mail a notice of the accrued balance each September 1. The Florida lesson from earlier in this series applies unchanged: this is a loan against the house, not relief.

The third program is the conversion-proof one. The disabled-veteran exclusion (§105-277.1C) removes the first $45,000 of appraised value for a veteran with honorable-service history and a total and permanent service-connected disability (or specially adapted housing benefits under 38 U.S.C. §2101), and for the unremarried surviving spouse — with, in the AV-9’s own words, no age or income limitation. No conversion of any size can disturb it. Certification runs on Form NCDVA-9 through a veterans service officer. Because the one-program-per-year rule forces a choice, a veteran who could also meet the elderly exclusion’s income test should compare: above $90,000 of home value, 50% of value exceeds $45,000 and the elderly exclusion is worth more — when its income test can be met at all.

Authority: N.C.G.S. §§105-277.1, 105-277.1B, 105-277.1C, 105-277.1F, 105-355(a); NCDOR Form AV-9 (2026); Form NCDVA-9

Does tax-free Roth money count toward the $38,800 test?

The reason the property-tax cliff belongs on a Roth page at all is the income definition, which is unlike anything on the income-tax side. §105-277.1(b)(1a) defines income for both means-tested programs as “all moneys received from every source other than gifts or inheritances received from a spouse, lineal ancestor, or lineal descendant.” That is a receipts test, not an AGI test: what the tax code taxes is beside the point; what arrived is the point.

Form AV-9’s own worksheet makes the breadth operational. Applicants report “IRA Distributions” on a line with no taxable-only qualifier; the interest line reads “Interest (Taxable and Tax Exempt)” and the Social Security line “Social Security Benefits (Taxable and Tax Exempt)”; a catch-all asks for “All other moneys received”; and the first two pages of the federal 1040 plus Schedule 1 go in as attachments. A Roth conversion is a 1099-R-reported IRA distribution that appears on that attached 1040, so it counts toward the limit — that much is close to certain.

The open question is the qualified Roth withdrawal. On its face, the definition captures money a qualified Roth withdrawal delivers — it is moneys received, it comes out of an IRA, and the form’s own lines sweep in tax-exempt interest and tax-exempt Social Security without blinking — but no statute, form, or bulletin addresses Roth accounts by name, and the test is administered by a hundred county assessors, not by the Department of Revenue. We state it exactly that far and no further. What makes it worth stating is the contrast: of the nine states covered so far in this series, North Carolina is the first where even tax-free money may sit inside a benefit means test. Ohio’s homestead test runs on MAGI, so a qualified Roth withdrawal there is invisible; North Carolina’s runs on receipts, where nothing is invisible. A retiree keeping a year’s income under $38,800 ahead of a benefit year should not assume the Roth bucket is a free pass here — and should not assume the opposite either, because the question has not been addressed in any published guidance.

Authority: N.C.G.S. §105-277.1(b)(1a); NCDOR Form AV-9 (2026), Part 5

529s, Medicaid, and the auto-IRA that never arrived

North Carolina’s 529 story is short because the state removed itself from it a decade ago. The 2013 tax overhaul (S.L. 2013-316) eliminated the state deduction for NC 529 Plan contributions effective tax year 2014 — the pre-2014 deduction had been $2,500 single and $5,000 joint, offered from 2006 through 2013 — and qualified withdrawals remain free of both federal and North Carolina tax. The College Foundation of North Carolina, the program administrator, states the repeal verbatim in its own FAQ.

That repeal is what makes the SECURE 2.0 §126 rollover — moving a seasoned 529 into the beneficiary’s Roth IRA — a state non-event twice over. First, conformity: S.L. 2026-31 (approved July 2, 2026) moved North Carolina’s Internal Revenue Code conformity date to July 5, 2025, capturing SECURE 2.0 and the OBBBA, and that act’s only decoupling is research-and-experimentation expensing — nothing touching §529 or §408A. A qualifying rollover that stays out of federal gross income therefore never enters North Carolina taxable income. Second, recapture: the deduction-clawback exposure that Illinois and New York savers face on outbound 529 money cannot exist where no deduction has been allowed since 2013. One honesty note: the Department of Revenue has published no §126-specific guidance — the conclusion rests on the conformity statute and the federal-AGI starting point — though the program administrator itself markets the rollover option. The federal conditions apply unchanged: fifteen years of account age, the $35,000 lifetime cap, the annual Roth IRA limit, and the five-year contribution lookback.

Medicaid long-term-care planning finds no shelter in a North Carolina Roth. The state’s Aged, Blind and Disabled manual (MA-2230 §X.C.4) excludes a retirement account only “if the funds cannot be withdrawn in a lump sum payment” — locked profit-sharing money, funds payable only as a monthly plan. Virtually every IRA and Roth IRA permits a lump-sum withdrawal, so both are countable resources against the reserve limit, and North Carolina has no payout-status rule of the kind that shelters annuitized IRAs in Florida and Texas — taking regular distributions does not move the account off the resource ledger here. Two nuances from the manual: a spouse’s or parent’s retirement account is not deemed in private-living-arrangement budgeting, but available retirement funds are counted in the community-spouse resource-protection assessment (MA-2231). The posted manual section carries 2011–2012 revision dates yet remains the current published policy — a vintage worth knowing when a caseworker cites it.

And the program column ends with an absence. North Carolina has no state auto-IRA: House Bill 79, the “North Carolina Work and Save” proposal for a voluntary payroll-deduction IRA program for small-business employees, was re-referred to the House Insurance Committee on June 25, 2025 and never moved again — the third such bill to stall since 2021 — and no North Carolina city runs a local program. So the mechanics that matter in auto-IRA states — default enrollment into a Roth IRA, automatic escalation, the excess-contribution trap for high earners auto-enrolled past the Roth IRA income phase-out — have no North Carolina counterpart to worry about.

Authority: S.L. 2013-316; CFNC NC 529 FAQ; S.L. 2026-31 §12(a), amending N.C.G.S. §105-228.90(b)(7); IRC §529(c)(3)(E), §408A(e) (SECURE 2.0 §126); NC DHHS ABD Medicaid Manual MA-2230 §X.C.4, MA-2231; N.C.G.A. H.B. 79 (2025)

Creditor protection: the statute that beat Clark v. Rameker by exactly a year

North Carolina's exemption statute names the accounts, and then it stops — no cap follows. N.C.G.S. §1C-1601(a)(9) exempts "individual retirement plans as defined in the Internal Revenue Code," and names them: "individual retirement accounts and Roth retirement accounts as described in section 408(a) and section 408A of the Internal Revenue Code," plus §408(b) annuities and §408(c) trust accounts. There is no dollar limit anywhere in the subdivision, and no "reasonably necessary for support" test of the kind that hollows out the federal §522(d)(10)(E) model — the whole balance is exempt, whatever its size. The provision has stood unamended since 2013; the legislature's most recent pass touched only its neighbor, when S.L. 2025-46 repealed the separate college-savings exemption at (a)(10) effective September 1, 2025, and left (a)(9) alone.

The second sentence is the one most states lack. It provides that any interest in such a plan "remains exempt after an individual's death if held by one or more subsequent beneficiaries by reason of a direct transfer or eligible rollover… including, but not limited to, a direct transfer or eligible rollover to an inherited individual retirement account as defined in section 408(d)(3)" — inherited accounts, protected by name, inherited Roths included. That sentence was added by S.L. 2013-91, approved June 12, 2013 — one year to the day before the U.S. Supreme Court decided Clark v. Rameker, 573 U.S. 122, on June 12, 2014, holding that an inherited IRA is not "retirement funds" under the federal exemption. North Carolina was not reacting to Clark; it answered the then-open circuit split before the Court did. And the session law's own Section 5 reaches backward: the protection "applies to all inherited individual retirement accounts without regard to the date an account was created."

Where the exemption operates is as broad as what it covers. Chapter 1C is the judgment-execution chapter: subsection (a) entitles each North Carolina–resident debtor to retain the listed property "free of the enforcement of the claims of creditors," so the shield works against an ordinary civil judgment with no bankruptcy filing — and it complements a wage-garnishment regime that is itself among the most restrictive anywhere, since North Carolina courts cannot order wage withholding for consumer debts at all. In bankruptcy, North Carolina is an opt-out state: §1C-1601(f) makes the federal §522(d) list unavailable and substitutes the state exemptions. The federal retirement-funds exemption of 11 U.S.C. §522(b)(3)(C) sits outside the opt-out and remains available on top — but it carries the $1,711,975 BAPCPA cap on contributory amounts for cases filed through March 31, 2028, and, after Clark, does not reach inherited accounts. For a North Carolina debtor the uncapped, inherited-inclusive state route is simply the stronger claim.

The carve-outs are the familiar ones. Section 1C-1601(e) makes the exemptions inapplicable to claims of the United States as provided by federal law, of the State for taxes and bonds, for child support, alimony or a distributive award under Chapter 50, and for criminal restitution orders docketed as civil judgments. Notably absent is any contribution-timing clawback: the statute's 90-day recent-purchase rule in subsection (d) applies only to subdivisions (a)(2) through (a)(5) — tangible personal property — never to the retirement exemption, so a contribution made on the courthouse steps faces only the general voidable-transactions act (G.S. §39-23.4) and its intent-to-defraud standard, not a mechanical lookback.

One doctrinal contrast matters for readers arriving from our Georgia guide. Georgia's protection is an exclusion: in In re Hoffman (11th Cir. 2022) a Georgia debtor's Roth IRA never became property of the bankruptcy estate at all, because 11 U.S.C. §541(c)(2) enforces the transfer restriction in Georgia's garnishment statute — a holding that rests on Georgia law and travels nowhere. North Carolina's protection is an exemption: the account enters the estate and is then exempted out under §1C-1601. We located no North Carolina authority arguing a §541(c)(2) route for an NC IRA — "no authority found" is the honest answer — and the distinction carries far lower stakes here than in Georgia, because the NC exemption is uncapped and covers inherited accounts by name, so there is little an exclusion would add.

Authority: N.C.G.S. §1C-1601(a)(9), (d), (e), (f); S.L. 2013-91 §§3(a), 5 (approved June 12, 2013); S.L. 2025-46 §6(b); Clark v. Rameker, 573 U.S. 122 (2014); 11 U.S.C. §522(b)(3)(C), (n); §541(c)(2) (the exclusion route, Georgia only); In re Hoffman, 22 F.4th 1341 (11th Cir. 2022) (Georgia law); G.S. §39-23.4; NC DOL garnishment guidance

No death taxes — and a 50/50 divorce presumption Texas lacks

North Carolina has repealed all three of the taxes that could once touch a Roth at death or by gift, each with its own date: the inheritance tax for deaths on or after January 1, 1999; the gift tax for gifts made on or after January 1, 2009 (S.L. 2008-107); and the estate tax for deaths on or after January 1, 2013 (S.L. 2013-316 §7 — enacted that July, so retroactive for the year). An inherited Roth IRA therefore reaches any beneficiary class with zero North Carolina tax of any kind, and there is no addback or lookback regime because there is no estate tax to add anything back into. What remains is federal: a Roth balance is includible in the federal gross estate at date-of-death value — income-tax exemption and estate-tax inclusion are independent questions — against the 2026 basic exclusion of $15,000,000.

Divorce is where North Carolina inverts the usual map. It is an equitable-distribution, separate-property state — and yet its statute issues the equal-division command that community-property Texas never does: under §50-20(c), "There shall be an equal division by using net value of marital property and net value of divisible property unless the court determines that an equal division is not equitable." The separate-property state starts at 50/50 by statutory presumption; Texas divides by what is "just and right," with no equal presumption at all. Roth IRA amounts accrued during the marriage are marital property subject to that presumption, and the account divides federally under IRC §408(d)(6) — a transfer incident to divorce, not a QDRO, which is an ERISA-plan device. The exemption statute knows about divorce too: §1C-1601(e)(9) makes the exemptions inapplicable to a Chapter 50 distributive award, so the creditor shield cannot be raised against an ex-spouse's equitable-distribution judgment.

Authority: former G.S. §§105-2–105-32 (inheritance tax, repealed eff. 1/1/1999); S.L. 2008-107 §28.18(a); S.L. 2013-316 §7; Rev. Proc. 2025-32; N.C.G.S. §50-20(c); IRC §408(d)(6); N.C.G.S. §1C-1601(e)(9)

Leaving North Carolina, arriving in North Carolina

North Carolina decides residency by domicile, with a day count written into the statute itself — and, unlike the states one and two back in this series, the day count is rebuttable. Under §105-153.3(15), a resident is anyone domiciled in the state at any time during the year or residing there for other than a temporary or transitory purpose; presence for more than 183 days creates a presumption of residency only "in the absence of convincing proof to the contrary." Ohio's checklist safe harbor is irrebuttable once its five criteria are met; New York decides by facts-and-circumstances audit with the taxpayer proving everything; North Carolina sits between — the presumption can be argued down. It is also one-way: per the D-401 instructions, absence for more than 183 days "raises no presumption that the individual is not a resident." There is no permanent-place-of-abode test and no 548-day foreign-assignment rule.

For the leaver, NCDOR states its audit rule plainly: a departing resident remains a North Carolina resident "until the individual has both established a definite domicile elsewhere and abandoned any domicile in North Carolina," and "a mere intent or desire to make a change in domicile is not enough; voluntary and positive action must be taken." Only one domicile can exist at a time, and the affirmative acts — the new home, the new license, voter registration, the day pattern — carry the burden.

Authority: N.C.G.S. §105-153.3(15); 2025 Form D-401 Instructions pp.4–5

In the move year itself, the distribution date decides everything. Schedule PN's Column B takes "the amount of Column A received from North Carolina sources or income received while a resident of North Carolina" — direct allocation by receipt date, not day-count proration. A part-year resident's conversion is all-in or all-out by the date the 1099-R says it was received: the standard deduction is taken in full and then effectively prorated through the Line 24 percentage, but the conversion itself never splits. Convert before the day North Carolina residency begins and Column B holds none of it; convert the day after and every dollar is in the numerator. If another state taxes the same income North Carolina taxes for the resident period, Form D-400TC's resident credit is the backstop — available to residents only, and "not on the basis of a withholding statement alone."

For the completed leaver, two independent walls stand between a conversion and Raleigh. Federal law forbids the tax: 4 U.S.C. §114 provides 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," and reaches IRAs — and so Roth conversions — through §114(b)(1)(E) and IRC §7701(a)(37). North Carolina's own law never gets that far: a nonresident's NC-source income is only income from North Carolina real or tangible property, a business carried on in North Carolina, or North Carolina gambling — a conversion is none of the three. NCDOR publishes no directive citing §114 (we could locate none), but it concedes the result operationally: Form NC-4P "is also to be used by a nonresident with a North Carolina address to indicate that no State income tax is to be withheld from pension payments." File it, and there is nothing withheld to reclaim.

Authority: 2025 Form D-401 Instructions, D-400 Schedule PN Part B and D-400TC Part 1; N.C.G.S. §105-153.4(b), (c); 4 U.S.C. §114(a), (b)(1)(E); IRC §7701(a)(37); Form NC-4P

For the arriver, the same clock runs in reverse. A $100,000 conversion received while a North Carolina resident costs $3,990 — 3.99% flat, at any age, because the state offers no age-65 standard-deduction add-on and no age-gated retirement exclusion to soften it. The same conversion received the week before residency begins costs North Carolina $0. And the price of waiting is now written down rather than guessed at: S.L. 2026-41 fixed the schedule in statute — 3.99% for 2026, 3.49% for 2027–2029, 3.24% for 2030–2032, 2.99% after 2032 — so the identical conversion costs $3,490 in 2027, by enacted law. Of the nine states covered so far in this series, North Carolina is the only one whose conversion rates for the next seven years are already statute.

Two mover's footnotes. Bankruptcy exemptions follow a slower clock than tax residency: 11 U.S.C. §522(b)(3)(A) assigns exemption law by the state of domicile for the 730 days before filing, so someone who moved into or out of North Carolina within two years of a petition may be forced onto the former state's list rather than §1C-1601's. And wage reciprocity is no help in either direction: no reciprocal agreement appears anywhere in NCDOR's withholding guidance — a negative established by absence rather than by an express statement — and reciprocity agreements cover wages only, never retirement income, which for nonresidents is already off-limits under §114.

Authority: N.C.G.S. §105-153.7(a) as rewritten by S.L. 2026-41 §44.1(a); 2025 Form D-401 Instructions p.14; 11 U.S.C. §522(b)(3)(A); NCDOR Withholding Tax FAQ

North Carolina against the other eight states in this series

Nine states in, North Carolina's profile is distinctive on three rows. Its 3.99% sits mid-pack among the states that tax a conversion — above Ohio and Pennsylvania, below Illinois and Georgia — but it is the only rate in the table with a statutory glide path under it: 3.49% for 2027–2029 is enacted law, not a pending proposal, and no other state of the nine covered so far has its next seven years of rates on the books. On the inherited-IRA row it joins Ohio in protecting inherited accounts by statutory name, and adds what Ohio's provision does not say expressly: retroactivity to accounts of any vintage. And on the local row it needs no constitutional bar — cities and counties may tax only as the General Assembly specifically authorizes, and no act has ever authorized a local income tax. What it lacks mirrors Ohio exactly: no age-based exclusion, so a 70-year-old converting in Charlotte pays the same 3.99% as a 30-year-old, where Georgia might charge the 70-year-old nothing.

Traps

Debunked

The dataset

Every figure on this page comes from a dataset of 75 facts, each carrying its statutory or administrative authority, a verbatim quote from the source, a confidence grade and an independent verification verdict. Of the researched facts, 70 were confirmed against primary sources and 5 were corrected before publication — one of those corrections was the page’s central fact, when the verification pass caught a July 2026 budget act that had rewritten the rate statute a month before our research. One cell that never received a verification verdict was cut rather than published, and one watch-item cell was retired when the law it watched was superseded. One further fact — the seven-year glide path that organizes this page — is a restatement of the enacted schedule with its own audit trail in the data.

The workbook carries seven sheets, including three live calculators — what a conversion costs at the enacted rate for any year of the statutory schedule, the Bailey sequencing decision, and whether to convert before or after a move. The CSV is one row per fact, with authority, source quote, confidence grade and verification verdict.

This page is educational and is not tax or investment advice. North Carolina’s out-year rates rest on a 2026 session law that a future session could amend, and the General Assembly’s online statute text still lags it; verify current figures against the session law and NCDOR before acting. Rate verified as of 2026-08-08.

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