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 spread out the conversion taxes over a two-year spread period. You can recognize the entire conversion immediately.
The Pension and Annuity Exclusion
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. 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. For example, if you spread your conversion over two years, you can exclude $10,000 of conversion income in each year. You can also use the $20,000 exclusion if you're age 59 1/2 and plan to take a distribution instead.
Federal Roth IRA Rules
There are other Roth IRA conversion rules you must follow as well. For example, you can only contribute $5,000 annually, or $6,000 if you're older than age 50. If you're married, file your income taxes jointly and want to contribute to a Roth, your AGI cannot exceed $177,000 for you to be eligible for a Roth. That means you may be able to convert existing balances to a Roth, but you cannot make additional contributions to the account.
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. You can also perform a trustee to trustee transfer or a same trustee transfer if your IRA funds 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.
- Internal Revenue Service; Individual Retirement Arrangements (IRAs); Feb. 3, 2011
- New York State Department of Taxation and Finance; New York Tax Treatment of Roth IRAs; Dec. 24, 1998
- Wells Fargo. "Roth IRA Distribution Rules," Accessed Dec. 5, 2019.
- Fidelity. "Roth IRA Conversions and Taxes," Accessed Dec. 5, 2019.
- Wells Fargo. "Converting to a Roth IRA," Accessed Dec. 5, 2019.
- Fidelity. "Tax-Savvy Roth IRA Conversions," Accessed Dec. 5, 2019.
- Schwab Charitable. "How Charitable Giving Can Help Reduce Taxes Resulting from Roth IRA Conversions," Accessed Dec. 5, 2019.
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.