Roth Conversions, RMDs & the NJ Retirement Exclusion: A 2026 Tax Strategy Guide

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Executive Summary for the Taxpayer. A Roth conversion can shift money from a traditional retirement account into a Roth IRA, creating taxable income today in exchange for potential tax-free qualified withdrawals later, but the conversion must be coordinated with federal brackets, New Jersey’s retirement-income rules, Medicare-related thresholds, capital gains, and quarterly estimated tax payments. For 2026, New Jersey’s official guidance does not show $130,000 and $97,500 as the maximum retirement-income exclusion amounts; the current published maximums are generally $100,000 for married taxpayers filing jointly and $75,000 for single filers, subject to income limits and percentage restrictions. IRS Publication 590-B; New Jersey Retirement Income Exclusions

The pre-RMD years are a planning window

Required minimum distributions generally begin at age 73 for taxpayers who reach age 72 after December 31, 2022, under the SECURE 2.0 changes. Taxpayers born in 1960 or later generally fall under the age-75 rule, so the correct starting age depends on your birth year. IRS Publication 590-B

A traditional IRA owner generally must take the first RMD by April 1 of the year after reaching the applicable required beginning date. Later RMDs are generally due by December 31 each year, and delaying the first distribution can result in two taxable distributions in one calendar year. [IRC § 401(a)(9)]; IRS Publication 590-B

The years before RMDs begin are often the period when you have the greatest control over taxable income. You may be able to use partial Roth conversions to fill a selected federal tax bracket, reduce the size of future traditional-account balances, and limit later forced distributions. A conversion is not automatically beneficial, however, because the converted amount is generally included in gross income for the year of conversion. [IRC § 408A]; IRS Publication 590-B

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How Roth conversions work in 2026

A Roth conversion generally moves taxable funds from a traditional IRA, SEP IRA, SIMPLE IRA, or eligible retirement plan into a Roth IRA. The taxable portion is reported for the year of the conversion, and the conversion cannot generally be reversed through a recharacterization after it is completed. IRC § 408(d)(3); IRS Publication 590-B

The basic strategy is to pay tax now at current rates in exchange for the possibility of tax-free qualified withdrawals and continued tax-free growth in the Roth IRA. A qualified Roth IRA distribution generally requires satisfaction of the five-year rule and another qualifying condition, such as reaching age 59½, disability, death, or a qualifying first-home distribution. IRC § 408A(d)(2); IRS Publication 590-B

A conversion does not have to be all or nothing. A partial conversion may be sized after reviewing:

  • Current taxable income and deductions.
  • The desired federal marginal tax bracket.
  • New Jersey total income and retirement-income exclusion rules.
  • Medicare premium exposure caused by modified adjusted gross income.
  • The 3.8% Net Investment Income Tax threshold.
  • Available cash to pay the resulting tax without using additional retirement funds.

The conversion should generally be completed by December 31 of the tax year for it to count for that year. A year-end estimate should be updated before execution because investment gains, bonuses, pension payments, and other distributions can change the available bracket space. IRC § 408A; IRS Publication 590-B

RMDs cannot be converted

Once RMDs apply, the ordering of distributions becomes critical. An RMD is not eligible for rollover treatment, and a Roth conversion does not satisfy the RMD requirement. [IRC § 401(a)(9)]; IRS Publication 590-B

A taxpayer in an RMD year should generally:

  1. Calculate the required minimum distribution for each applicable account.
  2. Take the full RMD before converting additional amounts.
  3. Keep the RMD amount out of the Roth conversion.
  4. Convert only eligible dollars in excess of the RMD.
  5. Confirm that federal and New Jersey withholding or estimated payments are adequate.

For most IRA owners using the Uniform Lifetime Table, the 2026 RMD is calculated using the prior December 31 account balance divided by the applicable denominator for the taxpayer’s age. At age 73, the denominator is 26.5 under the current table. For example, a $100,000 traditional IRA balance would produce an approximate $3,774 RMD before considering account-specific rules. IRS Publication 590-B

A Roth IRA has no lifetime RMD requirement for the original owner. That distinction is one reason taxpayers may evaluate conversions before RMDs begin, although beneficiary distribution rules apply after the owner’s death. IRC § 408A(c)(5); IRS Publication 590-B

New Jersey retirement-income exclusion: verify the figures

New Jersey provides a retirement-income exclusion for qualifying taxpayers who are age 62 or older or disabled, provided total income for the year is $150,000 or less. Qualifying income can include pension, annuity, and IRA withdrawals, subject to the applicable New Jersey worksheet and filing-status limitations. New Jersey Division of Taxation

The New Jersey Division of Taxation’s current published maximum exclusion amounts are:

  • Married filing jointly: up to $100,000.
  • Single, head of household, or qualifying surviving spouse: up to $75,000.
  • Married filing separately: up to $50,000.

These are maximum exclusion amounts, not automatic deductions. The actual benefit depends on qualifying retirement income, filing status, age or disability status, and total income. New Jersey Retirement Income Exclusions

For taxpayers with total income between $100,001 and $150,000, New Jersey applies a percentage of reported taxable pension, annuity, and IRA income rather than the full exclusion. The published percentages are:

  • Married filing jointly: 50% for income from $100,001 through $125,000, and 25% from $125,001 through $150,000.
  • Single or qualifying filing statuses: 37.5% for income from $100,001 through $125,000, and 18.75% from $125,001 through $150,000.
  • Married filing separately: 25% for income from $100,001 through $125,000, and 12.5% from $125,001 through $150,000.

At $150,001 or more, the taxpayer is generally not eligible for the pension exclusion under the current published guidance. New Jersey Retirement Income Exclusions

The figures sometimes cited as a $130,000 married-filing-jointly exclusion and a $97,500 single exclusion are not the maximum amounts shown in the current official New Jersey guidance. Retirement planning should use the applicable NJ-1040 instructions and worksheets for the filing year rather than an outdated summary or unofficial table. New Jersey Division of Taxation

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Federal and New Jersey treatment can diverge

Federal tax law generally treats taxable traditional IRA distributions and Roth conversions as ordinary income, not capital gain. New Jersey has its own rules for pension and annuity income, including calculations involving previously taxed contributions or basis, so the federal taxable amount should not automatically be copied onto the NJ-1040 without review. IRS Publication 590-B; New Jersey Pension and Annuity Income

A Roth conversion can also affect New Jersey planning even when the taxpayer expects to preserve the retirement-income exclusion. Increasing total income may reduce the percentage exclusion or eliminate it if the taxpayer exceeds the $150,000 limit. New Jersey Retirement Income Exclusions

For that reason, a New Jersey conversion model should show at least two results:

  • Federal taxable income and marginal-rate impact.
  • New Jersey total income and retirement-income exclusion impact.

The model should also account for pension income, Social Security, interest, dividends, rental income, business income, capital gains, and other distributions. A conversion that appears efficient federally may create an unexpected New Jersey cost if it changes eligibility for the state exclusion. New Jersey Division of Taxation

Capital gains and the 3.8% NIIT

Long-term capital gains are generally gains from assets held for more than one year. For 2026, federal long-term capital gains rates remain 0%, 15%, and 20%, with the following taxable-income thresholds:

Filing status 0% rate through 15% rate through 20% rate above
Single $49,450 $545,500 $545,500
Married filing jointly $98,900 $613,700 $613,700
Head of household $66,200 $579,600 $579,600
Married filing separately $49,450 $306,850 $306,850

Short-term capital gains are generally taxed at ordinary federal income-tax rates. These federal capital-gain thresholds use taxable income, so deductions and Roth-conversion income can affect the rate applied to investment gains. [IRC § 1(h)]; Rev. Proc. 2025-32

The Net Investment Income Tax is a separate 3.8% federal tax. It generally applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds the statutory threshold: $200,000 for single and head-of-household taxpayers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. [IRC § 1411]; IRS Net Investment Income Tax

Traditional IRA and qualified-plan distributions generally are not included in net investment income, but they can count toward the modified adjusted gross income threshold. Therefore, a Roth conversion may not itself be net investment income while still increasing MAGI enough to expose dividends, interest, rental income, or capital gains to the 3.8% tax. IRS Publication 590-B; IRS Net Investment Income Tax

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Quarterly estimated tax payments matter

A Roth conversion can create a tax liability without automatic withholding unless the taxpayer elects withholding from the distribution. Underpayment may result in federal estimated-tax penalties, including when insufficient withholding or estimated payments fail to cover the Net Investment Income Tax. IRS Net Investment Income Tax

For New Jersey taxpayers, the 2026 estimated-tax schedule generally includes:

  • April 15, 2026.
  • June 15, 2026.
  • September 15, 2026.
  • January 15, 2027.

A taxpayer considering a conversion late in 2026 should update federal and New Jersey estimates before completing the transaction. 2026 NJ-1040-ES Instructions

A practical year-end review should include:

  1. Projected wages, pensions, Social Security, interest, dividends, rentals, and capital gains.
  2. The traditional IRA balance and estimated RMD schedule.
  3. Proposed conversion amount.
  4. Federal taxable-income bracket.
  5. New Jersey total-income threshold and exclusion percentage.
  6. NIIT and Medicare-related MAGI exposure.
  7. Federal and New Jersey withholding or estimated payments.
  8. Cash available to pay tax outside the retirement account.

Brick Taxes provides New Jersey tax planning, retirement-income analysis, quarterly estimated tax support, and federal and state return preparation. To discuss a Roth conversion, NJ pension taxes, or an RMD projection, visit www.bricktaxes.com, schedule a resolution or planning call at calendly.com/bricktaxes/resolve, or call 732-540-1040.

Official Authorities Referenced