Roth IRA Conversions: A Strategy Guide for New Jersey Residents

A Roth IRA conversion is one of the most frequently discussed strategies in retirement planning, and for good reason. It involves moving money from a traditional IRA (or other pre-tax retirement account) into a Roth IRA, paying income tax on the converted amount now in exchange for tax-free withdrawals later. The concept is simple. The execution, and the decision about whether and when to do it, is where the complexity lives.

This guide explains how Roth conversions work, what the tax implications look like at both the federal and state level, and why New Jersey’s tax structure creates both risks and opportunities that residents in other states do not face.

How a Roth Conversion Works

In a traditional IRA or 401(k), your contributions may have been tax-deductible, meaning you got a tax break when the money went in. The trade-off is that withdrawals in retirement are taxed as ordinary income. A Roth IRA works the opposite way: contributions are made with after-tax dollars, but qualified withdrawals in retirement are completely tax-free.

A Roth conversion is the process of moving money from a traditional IRA into a Roth IRA. When you convert, the amount you move is added to your taxable income for that year. You pay income tax on it now, and in return, the converted funds grow tax-free and can be withdrawn tax-free in retirement.

A few key rules:

• There is no income limit on Roth conversions. Unlike Roth IRA contributions, which phase out at higher incomes, anyone can convert regardless of how much they earn.
• There is no limit on the amount you can convert. You can convert $5,000 or $500,000 in a single year. The question is whether doing so makes tax sense.
• Conversions cannot be undone. Prior to 2018, you could “recharacterize” (reverse) a Roth conversion. That option was eliminated by the Tax Cuts and Jobs Act. Once you convert, the tax bill is final.
• The 5-year rule applies to converted funds. Each Roth conversion has its own 5-year clock. If you withdraw converted funds before 5 years have passed and you are under age 59 1/2, you may owe a 10% early withdrawal penalty on the amount. After age 59 1/2, this is generally not a concern.

Why a Roth Conversion Can Make Sense

A Roth conversion is fundamentally a bet on your future tax situation. You are choosing to pay tax now at today’s rate in exchange for avoiding tax later. That trade-off works in your favor in several common scenarios:

• You are in a temporarily low tax bracket. The years between retirement and age 73, when required minimum distributions begin, are often lower-income years. Converting during this window means paying tax at a lower rate than you might face later.
• You expect tax rates to rise. Many current provisions of the Tax Cuts and Jobs Act are scheduled to sunset or be revised in coming years. If federal tax rates increase, having money in a Roth account means those higher rates will not affect your withdrawals.
• You want to reduce future required minimum distributions. Traditional IRA balances are subject to RMDs starting at age 73. Roth IRAs have no RMDs for the original account owner. Converting reduces the balance that will generate mandatory taxable withdrawals later.
• You want to leave tax-free money to heirs. Inherited Roth IRAs are still subject to the 10-year distribution rule under the SECURE Act, but the withdrawals are tax-free. That can be a meaningful benefit for beneficiaries, especially those in high tax brackets.
• You can pay the tax from non-retirement funds. The conversion makes the most financial sense when you pay the resulting tax bill from a separate taxable account rather than from the IRA itself. Using IRA funds to pay the tax reduces the amount that gets to grow tax-free.

Why Roth Conversions Matter More in New Jersey

New Jersey’s tax structure creates specific dynamics that make Roth conversion planning both more valuable and more complicated than in many other states. Three features of the NJ tax code are particularly relevant:

The Pension Exclusion Cliff

New Jersey allows qualifying retirees (age 62 or older) to exclude a portion of their pension, annuity, and IRA income from state income tax. The maximum exclusion for married couples filing jointly is $100,000 if their gross income is $100,000 or less, scaling down for incomes between $100,001 and $150,000, and disappearing entirely above $150,000.

This is a hard cliff, not a gradual phase-out. One dollar over $150,000 in gross income eliminates the entire exclusion. That single dollar can cost thousands in additional NJ state tax.

Here is where Roth conversions become strategically important: qualified withdrawals from a Roth IRA do not count toward the $150,000 gross income threshold. Traditional IRA withdrawals do. By converting pre-tax money to Roth before retirement, you are converting future income that would count against the threshold into future income that will not.

NJ Pension Exclusion Thresholds (Married Filing Jointly):

For a detailed breakdown of how pension exclusion thresholds work alongside other NJ retirement tax rules, see the GPS Wealth Management NJ Retirement Tax Guide.

No Standard Deduction

Unlike the federal tax system, New Jersey does not offer a standard deduction. Every dollar of taxable income is subject to state tax starting from the first bracket at 1.4%. This means Roth conversions add to your NJ taxable income with no buffer. The state tax cost of a conversion, while typically lower than the federal cost, is real and needs to be part of the calculation.

NJ Tax Brackets Are Graduated, Not Flat

New Jersey’s income tax rates range from 1.4% on the first $20,000 to 10.75% on income over $1 million. For most retirees, the effective rate on a Roth conversion will fall in the 5.525% to 6.37% range, but larger conversions can push income into higher brackets.

Understanding where your income falls in both the federal and NJ bracket schedules is the starting point for sizing a Roth conversion appropriately.

The Pro-Rata Rule: A Common Complication

If you have both pre-tax and after-tax (non-deductible) contributions in your traditional IRA accounts, the pro-rata rule determines how much of a conversion is taxable. You cannot choose to convert only the after-tax portion. The IRS looks at your total traditional IRA balance across all accounts and calculates the taxable percentage proportionally.

Example: You have $90,000 in pre-tax traditional IRA funds and $10,000 in after-tax (non-deductible) contributions across all your traditional IRAs. Your total balance is $100,000, and 90% of it is pre-tax. If you convert $20,000, the IRS treats 90% of that conversion ($18,000) as taxable income, regardless of which account the money came from.

The pro-rata calculation is based on your total IRA balances as of December 31 of the year you convert, including traditional, SEP, and SIMPLE IRAs. This is reported on IRS Form 8606.

A common workaround: If your employer’s 401(k) plan accepts incoming rollovers, you can roll your pre-tax traditional IRA balance into the 401(k). Since 401(k) balances are not included in the pro-rata calculation, this isolates your after-tax IRA contributions and allows you to convert them to a Roth with little or no tax impact. This is sometimes called a “backdoor Roth” strategy.

When a Roth Conversion Tends to Make the Most Sense

Roth conversions are not a one-size-fits-all strategy. The decision depends on your current tax bracket, your expected future bracket, your state tax situation, and your broader financial plan. That said, there are several windows where conversions tend to be most effective:

The Early Retirement Gap Years

If you retire before age 73 (when RMDs begin), you may have several years where your taxable income is significantly lower than it was during your working years. This “gap” is often the most tax-efficient window for Roth conversions because you can fill up lower federal and NJ tax brackets with converted income.

Before RMDs Begin

Once required minimum distributions start at age 73, they add mandatory taxable income every year, and that income grows as you age (because the distribution percentages increase). Converting some of your traditional IRA balance before RMDs begin reduces the base that generates those forced distributions.

Years With Unusual Deductions or Losses

If you have a year with large itemized deductions (significant medical expenses, charitable contributions, or business losses), those deductions can offset some of the income generated by a conversion. This lowers the effective tax cost.

Before a Potential Tax Rate Increase

Tax rates change over time. If you believe rates are more likely to go up than down (whether due to legislative changes, your own rising income, or both), converting now locks in the current rate on the converted amount.

When a Roth Conversion May Not Make Sense

A Roth conversion is not always the right move. There are situations where converting could actually leave you worse off:

• You are already in a high tax bracket. If the conversion pushes you into significantly higher federal or NJ brackets, the tax cost may outweigh the long-term benefit of tax-free withdrawals.
• You need the converted funds within five years and are under 59 1/2. The 5-year rule means converted amounts may be subject to a 10% penalty if withdrawn too early.
• You would have to pay the tax from the IRA itself. If you do not have separate funds to cover the tax bill, using IRA money to pay it means less is going into the Roth, which undermines the purpose of the conversion.
• The conversion would push you over the NJ pension exclusion cliff. If you are 62 or older and the conversion would push your gross income above $150,000, you could lose your entire pension exclusion for that year. Run the numbers carefully.
• You expect to be in a much lower bracket in retirement. If your retirement income will genuinely be lower and you expect to withdraw from traditional accounts at very low rates, the math may not favor paying tax now.

Watch for the Medicare IRMAA Impact

A consideration that is easy to overlook: Roth conversions increase your modified adjusted gross income (MAGI), and Medicare uses your MAGI from two years prior to determine whether you pay a surcharge on Part B and Part D premiums. This surcharge is called IRMAA (Income-Related Monthly Adjustment Amount).

For example, a large Roth conversion in 2026 could increase your Medicare premiums in 2028. The IRMAA thresholds are based on income tiers, and crossing a threshold can add hundreds of dollars per month to your premiums. This does not necessarily make the conversion a bad idea, but it is a cost that should be factored into the analysis.

How to Size a Roth Conversion

The question is rarely whether to convert everything or nothing. It is how much to convert in a given year. The goal is typically to convert enough to take advantage of lower tax brackets without triggering unnecessary costs. A few principles:

• Fill the bracket, don’t bust it. If you are in the 22% federal bracket and the top of that bracket is $201,050 for married filing jointly, you can estimate how much conversion income will keep you within that bracket before jumping to 24%.
• Watch the NJ threshold. If you are 62 or older and your income is near the pension exclusion cliffs, size your conversion so that it does not push you over. Losing the exclusion can cost more in NJ state tax than the conversion saves long-term.
• Check the IRMAA tiers. Make sure the conversion does not push your MAGI past an IRMAA income threshold for Medicare, or if it does, that the additional premium cost is worth the trade-off.
• Think in multi-year terms. A series of partial conversions over five to ten years is often more tax-efficient than a single large conversion. Spreading it out keeps you in lower brackets each year.

This type of year-by-year conversion analysis is one of the planning exercises the advisors at GPS Wealth Management work through with clients regularly, particularly for New Jersey residents approaching or in early retirement. It involves projecting income, taxes, Social Security, RMDs, and Medicare costs across multiple years to find the most tax-efficient conversion schedule.

Is a Roth Conversion Right for You?

A Roth conversion can be a powerful part of a retirement strategy, but it is not a decision that should be made in isolation. It touches your federal taxes, your New Jersey state taxes, your Medicare costs, your estate plan, and your long-term withdrawal strategy. Getting the timing and sizing right requires looking at the full picture.

The team at GPS Wealth Management in Marlton, New Jersey, works with individuals and families across South Jersey on retirement planning, tax planning strategies, and investment management. If you are considering a Roth conversion and want to understand how it fits into your plan, contact the team or call 856-552-0746.

This content is for informational purposes only and is not a replacement for real-life advice. Please consult your tax, legal, or financial professionals before modifying your strategy.

Individualized legal advice not provided. Please consult your legal advisor regarding your specific situation.

Specific individualized tax advice not provided. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.