You pay income tax on the amount you convert in the year you convert it

When you move money from a traditional IRA or 401(k) into a Roth account, the IRS treats that transfer as income on your tax return for that year. If you convert $50,000, you owe federal income tax on $50,000 of additional income — taxed at your ordinary income tax rate, not at capital gains rates.

The tax bill arrives when you file your return the following spring, not when you move the money. You do not pay it upfront from the account itself. This means you need to have cash available elsewhere to pay the tax, or you can withdraw money from the IRA to cover it — though that withdrawal also counts as taxable income and may trigger a 10% early withdrawal penalty if you are under 59½.

The conversion itself does not trigger the 10% early withdrawal penalty, even if you are younger than 59½. The penalty applies only if you withdraw the converted funds before age 59½ and before the account has been open for five years (the "five-year rule").

Key Takeaways

  • You owe ordinary income tax on the full amount converted, calculated at your tax bracket for that year.
  • The tax is due when you file your return the following spring, not when you move the money.
  • You must pay the tax from outside the account; if you withdraw from the IRA to pay it, that withdrawal is also taxable.
  • The conversion itself does not trigger a 10% penalty for early withdrawal, but withdrawing the converted money before age 59½ and five years of account ownership does.
  • Your total income for the year (including the conversion) may push you into a higher tax bracket, increasing the tax on all your income.

How the conversion amount is calculated for tax purposes

The taxable amount depends on whether your traditional IRA holds pre-tax money, after-tax money, or both. If your IRA contains only pre-tax contributions (the money you deducted when you contributed it), the entire conversion is taxable.

If you have after-tax money in the account — contributions you made with money you already paid tax on — the IRS uses a "pro-rata rule" to split the conversion. You cannot cherry-pick only the after-tax portion to convert. Instead, the IRS calculates what percentage of your total IRA balance is after-tax money, and applies that percentage to the conversion. The rest is taxable.

For example: if your traditional IRA holds $100,000 total, and $20,000 of that is after-tax contributions, then 20% of any conversion is non-taxable and 80% is taxable. A $50,000 conversion would mean $40,000 is taxable income and $10,000 is not.

What happens if you convert and your income rises into a higher tax bracket

The conversion adds to your total income for the year, which can push you into a higher tax bracket. This means not only does the conversion itself get taxed at a higher rate, but all your other income for the year may also be taxed at that higher rate.

If you earn $80,000 in salary and convert $30,000, your taxable income is $110,000. Depending on your filing status and the year, that $30,000 may be taxed partly at your original bracket and partly at a higher one. The higher bracket applies to all income above the threshold, not just the conversion.

This is why many people convert in years when their income is lower than usual — after a job loss, during retirement before Social Security starts, or in a year with large deductible losses.

State income tax on conversions

Most states that have an income tax also tax Roth conversions as ordinary income in the year of conversion. A few states do not tax retirement account conversions at all, and a handful have special rules.

You will owe state tax in the state where you live on December 31 of the conversion year, regardless of where the account is held or where you work. If you move to a state with no income tax after converting, you still owe tax to your old state for that conversion year.

Check your state's tax authority website or speak with a tax professional about your state's specific rules, because they vary widely and can affect whether a conversion makes sense in a particular year.

Medicare premiums and other income-based benefits affected by conversions

The conversion income counts toward your Modified Adjusted Gross Income (MAGI), which determines your Medicare Part B and Part D premiums if you are 65 or older. Higher MAGI means higher premiums, and the increase can last for two years after the conversion year.

If you receive other income-based benefits — such as subsidies for health insurance through the marketplace, Supplemental Security Income, or certain student aid — a conversion may reduce your benefit amount or make you ineligible. The effect depends on the specific program and your other income.

This is another reason to plan conversions carefully and consider the year in which you convert. A conversion that saves you money in taxes might cost you more in higher Medicare premiums or lost benefits.

The pro-rata rule and why it matters if you have multiple IRAs

The pro-rata rule applies to all your traditional IRAs combined, not to each account separately. If you have three traditional IRAs and one 401(k), the rule looks at the total balance across all the IRAs. The 401(k) is separate and does not count toward the pro-rata calculation.

This creates a trap: if you have a large traditional IRA with pre-tax money and a small IRA with after-tax money, you cannot convert only the small after-tax IRA tax-free. The pro-rata rule will make most of the conversion taxable.

One workaround is to roll the pre-tax IRA into your employer's 401(k) plan, if the plan allows it. This removes the pre-tax money from the pro-rata calculation, so a later conversion of the after-tax IRA is mostly or entirely non-taxable. Not all 401(k) plans allow this, so check with your plan administrator first.

Reporting the conversion on your tax return

You report a Roth conversion on IRS Form 8606, "Nondeductible IRAs." You file this form with your tax return in the year of the conversion. The form calculates how much of the conversion is taxable based on your IRA balances and the pro-rata rule.

Your financial institution will send you a Form 1099-R showing the conversion amount. The form itself does not always show the correct taxable amount — that depends on your specific situation and the pro-rata calculation. Form 8606 is where you do the actual math.

If you do not file Form 8606 or file it incorrectly, the IRS may treat the entire conversion as taxable, even if part of it should have been non-taxable. Filing correctly protects you from overpaying tax.

Frequently Asked Questions

Can I undo a conversion if I change my mind about the tax bill?

You can reverse a conversion through a process called a "recharacterization," but only under specific circumstances and within strict time limits. The rules changed in 2018, and most conversions can no longer be recharacterized. Speak with a tax professional about whether your conversion qualifies before relying on this option.

Do I have to pay the conversion tax all at once?

You pay the tax when you file your return the following spring. You can make estimated tax payments throughout the year if you want to spread the cost, but the full amount is due by the tax filing important date. If you do not pay enough, you may owe penalties and interest.

What if I convert in December — when do I owe the tax?

A conversion in December is taxable in that calendar year, even though you file the return the following spring. The tax is due by April 15 of the following year (or the extended important date if you file for an extension). The timing of the conversion does not change the tax year it falls in.

Does the conversion count as income for student aid purposes?

Yes, the conversion increases your income for the year, which can reduce financial aid may be able to access for you or your dependents. If you have a child in college or planning to attend, a conversion in that year or the prior year may lower aid amounts. Plan conversions with this in mind if education costs are part of your picture.

Am I required to convert a certain amount each year?

No. Roth conversions are entirely optional and happen only when you choose to do them. There is no minimum or maximum amount, and you can convert in some years and not others. You control the timing and amount to match your tax situation and financial goals.