27 Mar I’m confused about tax from my Roth IRA conversion

Q. I am 75 years old, take my Required Minimum Distributions (RMDs) every year and convert some of my IRA monies to a Roth IRA, paying the tax as I do that. I retired in 2002 and my deferred compensation contributions were from post-tax money for NJ and pre-tax for federal purposes. In computing the tax I owe, the IRA withdrawal worksheet gives me an amount for New Jersey tax that I can exclude. For instance, suppose I converted $20,000 from the IRA to a Roth, I might have to pay tax on $12,000 while $8,000 is excluded. Am I required to take the exclusion? I would prefer to pay the New Jersey tax on the entire $20,000 if adding the extra $12,000 to my income still keeps me under the $100,000 income figure since no taxes would still be due for the state?
— Taxpayer

A. Managing the taxes on retirement withdrawals — and on your tax return — is important.

And as you see, it can be complicated.

It seems you are asking if you can increase the previous year’s taxed contributions, which would increase the non-taxable portion of your remaining deferred compensation plan, which you could carry forward to a future year when your taxable income exceeds the New Jersey threshold for being taxable.

The answer, unfortunately, is no, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

He said the calculation for the retirement income exclusion talks about “your taxable pension,” not gross distribution, noting that the use of the word “pension” here includes other retirement plans including IRAs.

“Before the change in the New Jersey tax law on retirement income exclusion, if you exceeded the $100,000 taxable income ceiling even by $1 you lost the entire exclusion,” he said. “The good news is that now, the law allows a phaseout of the exclusion.”

For example, a single person whose taxable income, including their taxable pension, is $110,000, allows for an exclusion of 37.5% of their taxable pension.

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This story was originally published in March 2024.

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