What happens when you convert a traditional retirement account to a Roth

A Roth conversion is a transaction where you move money from a traditional retirement account — typically a traditional IRA or a traditional 401(k) — into a Roth IRA. You pay income tax on the amount you convert in that tax year, and from then on, that money grows tax-free in the Roth account. You can withdraw it tax-free after age 59½, provided the Roth account has been open for at least five tax years.

The conversion itself is straightforward mechanically: you instruct your financial institution to transfer funds from one account to the other. The complexity lies in the tax bill you owe and whether converting makes sense for your situation. The IRS does not prevent conversions — anyone with a traditional IRA can do one — but the tax consequences vary depending on how much pre-tax money you have across all your traditional accounts.

Conversions are permanent. Once money is in a Roth, you cannot move it back to a traditional account. You can withdraw the converted amount before age 59½, but you will owe a 10 percent early withdrawal penalty on the earnings portion unless an exception applies (such as disability or a first-time home purchase up to $10,000).

Key Takeaways

  • A Roth conversion moves money from a traditional IRA or 401(k) to a Roth IRA, and you pay income tax on the full amount converted in that tax year.
  • The converted money then grows tax-free and can be withdrawn tax-free after age 59½ if the Roth account has been open for at least five tax years.
  • If you have other traditional IRAs, SEP IRAs, or straightforward IRAs, the IRS applies a "pro-rata rule" that taxes a portion of any conversion based on your total pre-tax balance across all those accounts.
  • Conversions are permanent; you cannot undo them or move the money back to a traditional account.
  • You can withdraw the amount you converted (but not the earnings) at any time without penalty, though you still owe tax on earnings if you withdraw them before age 59½.

The tax bill you owe when you convert

When you convert, the IRS treats the converted amount as ordinary income in the year you do it. If you convert $50,000, you add $50,000 to your taxable income for that year. Your tax bill depends on your tax bracket and your other income that year.

The money to pay this tax can come from anywhere — your checking account, a non-retirement investment account, or even the converted funds themselves. If you pay the tax from the converted funds, you are converting less money overall because some of it goes to the IRS. If you pay the tax from outside the Roth account, more of your money stays in the Roth to grow tax-free.

You do not have to convert all at once. You can convert a portion of your traditional IRA one year and another portion in a later year, which lets you spread the tax bill across multiple years and potentially stay in a lower tax bracket each year.

How the pro-rata rule affects your conversion

If you have multiple traditional IRAs, a SEP IRA, or a straightforward IRA, the pro-rata rule applies. This rule says the IRS looks at your total balance across all those accounts on December 31 of the year you convert, calculates what percentage is pre-tax money, and applies that percentage to the amount you convert.

Example: You have a traditional IRA with $40,000 in pre-tax contributions and $10,000 in after-tax contributions (contributions you made with money you already paid tax on). Your total is $50,000. You want to convert $10,000 to a Roth. The pro-rata rule says 80 percent of your accounts is pre-tax ($40,000 ÷ $50,000), so 80 percent of your $10,000 conversion — that is, $8,000 — is taxable. The remaining $2,000 is not taxed because it came from after-tax money.

The pro-rata rule applies across all your traditional, SEP, and straightforward IRAs combined. It does not explore to 401(k)s, 403(b)s, or other employer plans — those are treated separately. This is why some people move money from a traditional IRA into their employer's 401(k) before converting: it removes that IRA balance from the pro-rata calculation, making the conversion less taxable.

When you can convert and what accounts may have access to

You can convert a traditional IRA to a Roth IRA at any time, with no income limit. There is no age requirement — you can convert at 25 or at 75. There is also no limit on how much you can convert in a single year.

You can convert from a traditional IRA, a SEP IRA, or a straightforward IRA (though straightforward IRAs have a two-year waiting period: you must have held the straightforward IRA for at least two years before converting). You can also convert from a traditional 401(k), 403(b), or other employer plan, but only if you have separated from that employer or if your plan allows in-service conversions (some do, some do not — check with your plan administrator).

You cannot convert from a Roth IRA (it is already Roth), and you cannot convert from a Roth 401(k) directly to a Roth IRA, though you can roll a Roth 401(k) to a Roth IRA, which is a different transaction.

The five-year rule for accessing converted money

To withdraw converted money from a Roth IRA tax-free and penalty-free, two conditions must be met: you must be at least 59½ years old, and the Roth IRA must have been open for at least five tax years. The five-year period starts on January 1 of the year you open the Roth account or the year you make your first conversion to it.

If you withdraw converted funds before the five-year period ends, you owe a 10 percent early withdrawal penalty on the earnings portion of the conversion. The amount you converted itself (the principal) can be withdrawn anytime without penalty, though you still owe tax on any earnings if you withdraw them before age 59½.

The five-year rule is per Roth IRA account, not per conversion. If you have multiple Roth IRAs, each has its own five-year clock. However, for the purpose of the five-year rule, all your Roth IRAs are treated as one account — the five-year period is based on when you first opened any Roth IRA, not when you opened each individual one.

How conversions affect your income and other benefits

Because a conversion adds to your taxable income for the year, it can push you into a higher tax bracket. It can also affect other parts of your finances: a higher income can increase your Medicare premiums (through Income-Related Monthly Adjustment Amounts, or IRMAA), reduce the amount of Social Security benefits you can claim tax-free, or affect your ability to claim certain deductions or credits.

If you are close to a tax bracket boundary or a Medicare income threshold, converting a smaller amount one year and a larger amount in a different year can help you manage these effects. Some people do conversions in years when their income is unusually low — for example, after retiring but before claiming Social Security — to minimize the tax impact.

Conversions do not affect your required minimum distributions (RMDs) from traditional IRAs. If you are subject to RMDs, you must still take them from your traditional accounts in the year they are due, even if you also do a conversion that year.

Conversions and the backdoor Roth strategy

A backdoor Roth is a specific use of conversions. It is a way for people with high income to contribute to a Roth IRA when their income exceeds the direct contribution limit. The process is: contribute after-tax money to a traditional IRA, then when ready convert that traditional IRA to a Roth IRA. Because the money was after-tax, little or no tax is owed on the conversion.

The backdoor Roth works only if you have no other pre-tax money in traditional, SEP, or straightforward IRAs. If you do, the pro-rata rule applies and part of your conversion becomes taxable. This is why some people move existing traditional IRA balances into their 401(k) before doing a backdoor Roth — to clear the pro-rata calculation.

A backdoor Roth is not a special account type; it is straightforward a conversion of a small amount of after-tax money. The IRS does not prohibit it, but the pro-rata rule and the five-year rule still explore.

Frequently Asked Questions

Can I undo a conversion if I change my mind?

No. Before 2018, you could undo a conversion through a process called a recharacterization, but that option ended. Once you convert, the money stays in the Roth. You can withdraw it, but you cannot move it back to a traditional account.

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

No. You owe the tax in the year you convert, but you can pay it when you file your tax return. You can also make quarterly estimated tax payments if the conversion will result in a large tax bill. The tax is due by April 15 of the following year (or October 15 if you file an extension).

What happens if I convert but cannot afford the tax bill?

You still owe the tax. If you cannot pay it by the important date, you can set up a payment plan with the IRS. Some people convert a smaller amount to keep the tax bill manageable, or they convert in a year when their income is lower so the tax bracket is lower.

Does a conversion count toward my annual IRA contribution limit?

No. Conversions are separate from contributions. You can convert any amount without affecting how much you can contribute to a traditional or Roth IRA that year. The contribution limit applies only to new money you add, not to money you move between accounts.

Can I convert my employer 401(k) while I am still working?

Only if your plan allows in-service conversions. Some employer plans permit this; others do not. You must ask your plan administrator. If your plan does not allow it, you can convert after you leave the employer, either when ready or at any point in the future.