17 Sep Will this strategy help my Roth IRA conversion be tax-free?

Q. If I can keep a Roth conversion amount and other income below my tax filing status in any given year, will that conversion be tax-free?
— Strategy-driven

A. Roth conversions are a popular topic these days.

Let’s go through how your income bracket is determined.

Each filing status has an income threshold that dictates at what point a tax return is necessary for any given year, said Cynthia Fusillo, a certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

These are the federal thresholds for taxpayers under the age of 65: single is $12,200, married filing jointly and qualifying widow(er) is $24,400 and head of household is $18,350.

At age 65 and older, these amounts increase to $13,850, $27,000 and $20,000, respectively, for the three filing statuses above.

Married filing separately at any age is $5. (Not a type-o. Check page 9 of this IRS guide.)

“These amounts — other than for married filing separately — are the standard deduction amounts for each filing status and are generally indexed annually for inflation,” she said.

The thresholds on a New Jersey resident return, as luck would have it, are different: single or married filing separately is $10,000, married filing jointly, while head of household or qualifying widow(er) is $20,000, she said.

For New Jersey, the pension and other retirement income exclusion kicks in at age 62, providing potentially a higher limit of $100,000 before tax is incurred, she said.

A Roth conversion is when you take funds from either a traditional IRA or traditional 401(k) and move them into a Roth IRA account.

“It may be a good idea to convert funds to a Roth in certain cases, such as leaving money tax-free to heirs, having the benefit of tax-free withdrawals, and no mandatory distribution rules, to name just a few,” Fusillo said. “You should absolutely consult with your tax advisor to see if it’s a good idea for you.”

However, to your question, when a Roth conversion consists of funds that were not already taxed previously by New Jersey, the result is taxable income in the year of conversion, Fusillo said.

“When this conversion income, along with any other income you have for the same year falls below the filing threshold amounts stated earlier, you would then not have any associated tax on the transaction,” she said.

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This story was originally published on Sept. 17, 2020.

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