A Roth individual retirement account (IRA) allows you to accumulate investment returns on a tax-free basis. You can convert a traditional IRA to a Roth IRA and later take tax-free distributions without worrying about IRS rules. However, there is one caveat: You have to pay federal and state taxes when you convert.
New York State Rules
New York's tax laws conform to the federal laws pertaining to Roth IRA conversion. As such, residents and non-residents who convert to the Roth must report the conversion amount as part of adjusted gross income (AGI), which will be taxed at the account owner's income tax rate. You can recognize the entire conversion immediately. Of course, you'll want to know the allowances and limitations of age and income.
Pension Exclusion NYS
If you're at least age 59 1/2, New York allows you to exclude up to $20,000 in total pension or annuity conversion income, explains the New York State Department of Taxation and Finance. Because your total conversion is added to your income – even if you didn't take a distribution – this means that you'll save income taxes on $20,000 of your conversion. You can also use the $20,000 NYS pension exclusion if you're age 59 1/2 and plan to take a distribution instead.
Types of Rollovers
You can convert a traditional IRA to a Roth IRA in one of three ways. The most common way is called the "rollover." You'll receive a distribution from the traditional account and deposit the funds into a new Roth IRA within 60 days. Be forewarned: If you don't complete the transfer within 60 days, you'll have to pay a 10 percent penalty when you report it on your tax return.
You can also perform a trustee to trustee transfer or a same trustee transfer if your IRA funds are in a trust. Regardless of how the funds are rolled over, you'll have to pay conversion taxes to both New York State and the federal government.
Federal Roth IRA Rules
While there aren't new Roth conversion rules to follow, you should be aware of how you can contribute to the account moving forward. For example, the IRS says you can only contribute $6,000 annually, or $7,000 if you're older than age 50 in 2022, so you'll want to keep this in mind when making contributions after the rollover. Plus, while Wells Fargo says the income restrictions don't apply for the rollover, your income and filing status will determine whether you can contribute – and how much – moving forward.
According to the IRS, if you're married, file your income taxes jointly and want to contribute to a Roth, your AGI cannot exceed $204,000 for you to be eligible to fully contribute to the Roth IRA. If your AGI is greater than $204,000 but less than $214,000 you can contribute a reduced amount. Any couple filing jointly, making over $214,000 cannot contribute.
For individuals filing as single or head of household and those married filing separately, your AGI cannot exceed $129,000 if you want to contribute the max. If the AGI is between $129,000 and $144,000 then the amount allowed in contributions is reduced. When the AGI is over $144,000, the allowed contributions is reduced to zero.
Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.