13 Jun I converted an IRA to a Roth. When are the taxes due?

Q. When are the taxes owed to the IRS and New Jersey for the increased taxes owed due to a Roth Conversion? For example, on May 1, I converted $100,000 from an IRA to a Roth IRA. Assuming a 22% marginal tax rate and this $100,000 conversion simply tops off the 22% IRS tax bracket (married filing jointly), then when is the deadline to remit additional $22,000 taxes to IRS without incurring penalty and interest? Does this money need to be sent right away or can it wait until when the tax return is filed sometime before April 15, 2025?
— Taxpayer

A. You are correct that the conversion of a traditional IRA to a Roth IRA is a taxable event.

And you’re also smart to want to avoid any penalties and interest because of an underpayment of taxes.

Based on the facts found in your example it is assumed that you obtained a federal income tax deduction for all amounts you contributed to your IRA historically, said Neil Becourtney, a certified public accountant and tax director with Smolin, Lupin & Co. in Red Bank.

Using your example, your 2024 federal adjusted gross income will increase by $100,000. The normal rules for avoiding an underpayment of estimated tax penalty will apply to your overall tax situation, he said.

“For federal purposes, you need to pay the lesser of 90% of your 2024 tax liability or 110% of your 2023 tax liability, commonly referred to as the `safe harbor’ assuming your 2023 adjusted gross income was greater than $150,000 — if $150,000 or lower the safe harbor percentage drops to 100%,” he said. “Tax payments can be a combination of withholding and quarterly estimated tax payments including any overpayment applied from 2023.”

For New Jersey purposes, Becourntey said, it is entirely possible that an amount less than $100,000 will be taxable income for 2024 stemming from the conversion as only the portion of your converted IRA that would be subject to New Jersey tax had it been withdrawn will be taxable.

“For instance, if you were making yearly IRA contributions over time, then you did not get any New Jersey deduction for the contributions and only the portion of your IRA representing investment growth would be subject to New Jersey tax,” he said. “The same would be true if you had rolled over a distribution from a Sec. 403(b) plan to your IRA.”

“On the other hand, a rollover from a 401(k) plan to your IRA would result in the same taxable income as for federal purposes upon conversion to Roth,” he said.

For New Jersey, you need to pay the lesser of 80% of your 2024 tax or 100% of your 2023 tax in order to avoid incurring an underpayment penalty, Becourtney said, noting a taxpayer’s prior year income does not factor into the calculation of estimated payments needed in order to avoid being underpaid.

“Assuming you were already set up to make quarterly estimated payments based on your 2023 income tax liabilities, then you can put off any further payment of 2024 income tax triggered by the taxable income generated by your IRA conversion until April 15, 2025, the due date for your 2024 income tax returns,” he said.

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This story was originally published in June 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.