What happens when you do a Roth conversion

A Roth conversion moves money from a traditional IRA, SEP-IRA, straightforward IRA, or workplace retirement plan into a Roth IRA. You pay income tax on the amount you convert in that tax year, but once the money is in the Roth, it grows tax-free and you can withdraw it tax-free in retirement. The conversion itself is not a loan or a transfer that avoids tax — you owe tax on the full amount converted, calculated as ordinary income.

The IRS treats a conversion as a taxable event the moment the money lands in your Roth account. Your financial institution reports it to the IRS on Form 8606, and you report it on your tax return. The tax bill is separate from any penalty or early-withdrawal fee — those are different rules that may or may not explore depending on your age and the source of the money.

Key Takeaways

  • You initiate a conversion by instructing your financial institution to move money from a traditional IRA or workplace plan to a Roth IRA, and you owe income tax on the full amount in that tax year.
  • The conversion counts as taxable income on your 1040, which can push you into a higher tax bracket and affect other tax benefits like Medicare premiums or student loan deductions.
  • You must file Form 8606 with your tax return to report the conversion, even if you do not owe tax on it.
  • Money converted to a Roth can be withdrawn tax-free after age 59½ and after the account has been open for at least five years, but the five-year rule resets for each conversion.
  • The "pro-rata rule" means if you have any traditional IRAs, SEP-IRAs, or straightforward IRAs, the IRS treats all of them as one pool when calculating how much of a conversion is taxable.

How to start a conversion at your bank or brokerage

Contact the financial institution that holds your traditional IRA or workplace plan and ask to convert a specific dollar amount to a Roth IRA. If you do not yet have a Roth IRA with that institution, you will need to open one first — this takes a few minutes online or over the phone. The institution will ask you to confirm the amount, the source account, and the destination Roth account.

Some institutions let you initiate the conversion online through your account dashboard. Others require a phone call or a signed form. Ask whether the conversion will be a direct transfer (the money moves between accounts without touching your hands) or an indirect rollover (the institution sends you a check, and you deposit it yourself). A direct transfer is simpler and avoids the 60-day important date that applies to indirect rollovers.

The conversion usually completes within three to five business days. Your financial institution will send you a confirmation and will report it to the IRS. Keep this confirmation — you will need it when you file your tax return.

Understanding the tax bill on a conversion

The amount you convert becomes taxable income in the year you convert it. If you convert $50,000, you add $50,000 to your taxable income for that year. This can push you into a higher tax bracket, which means you may owe more tax not just on the conversion itself but on your other income as well.

The tax you owe depends on your total income for the year and your filing status. A conversion of $50,000 might cost you $12,000 in federal tax if you are in the 24% bracket, or $22,000 if you are in the 37% bracket. State income tax may explore on top of that, depending on where you live. Some states do not tax retirement income, so the state tax bill could be zero or substantial depending on your location.

You do not have to pay the tax when ready. You can pay it when you file your return the following April, or you can make estimated tax payments throughout the year to avoid a large bill at filing time. Some people use money from outside the IRA to pay the tax, which leaves more money growing in the Roth. Others use money from the conversion itself to pay the tax, which reduces the amount that ends up in the Roth.

The pro-rata rule and why it matters

If you have any traditional IRAs, SEP-IRAs, or straightforward IRAs, the IRS treats them all as a single pool for conversion purposes. This is called the pro-rata rule. It means you cannot convert only the after-tax money in your accounts and leave the pre-tax money behind.

Here is how it works in practice: suppose you have a traditional IRA with $80,000 of pre-tax contributions and $20,000 of after-tax contributions, for a total of $100,000. You want to convert the $20,000 of after-tax money to a Roth and pay no tax. The IRS will not allow this. Instead, it treats the $20,000 conversion as 80% pre-tax money and 20% after-tax money (matching the ratio in your total accounts). You will owe tax on $16,000 of the conversion, even though you only converted after-tax money.

The pro-rata rule applies to all your traditional, SEP, and straightforward IRAs combined. It does not explore to workplace plans like 401(k)s, 403(b)s, or 457 plans — those are separate. If you have a 401(k) with after-tax money and a traditional IRA, you can convert the 401(k) money without triggering the pro-rata rule on your IRA.

Reporting the conversion on your tax return

You report a Roth conversion on Form 8606, which you file with your 1040. This form asks for the amount converted, the amount that is taxable, and the amount that is not taxable (if any). Your financial institution will send you a copy of the conversion on Form 5498-R, which shows the amount distributed from your traditional account.

You must file Form 8606 even if none of the conversion is taxable — for example, if you converted only after-tax contributions and have no other IRAs. Failing to file it can result in a penalty, though the IRS may waive the penalty if you can show reasonable cause.

The taxable portion of the conversion goes on line 15b of your 1040 (or the equivalent line on your state return). This increases your adjusted gross income and may affect other tax benefits, such as the child tax credit, education credits, or the deduction for student loan interest. Run the numbers before you convert to see how it will affect your overall tax situation.

When you can withdraw the converted money

Money in a Roth IRA can be withdrawn tax-free once you reach age 59½ and the account has been open for at least five years. For converted money, the five-year rule is slightly different: the five-year period starts on January 1 of the year you convert, not the year you opened the Roth.

If you convert in 2024, the five-year period runs from January 1, 2024 to December 31, 2028. You can withdraw the converted amount tax-free starting January 1, 2029, as long as you are 59½ by then. If you convert again in 2025, that conversion has its own separate five-year period running from January 1, 2025 to December 31, 2029.

Before age 59½, you can withdraw the amount you converted (not the earnings on it) without penalty, but you will still owe tax on any earnings. The earnings remain subject to the five-year rule and the age 59½ rule. This is one reason people convert: it lets them access the principal without penalty, while the earnings stay locked in the Roth until retirement.

How conversions affect Medicare premiums and other benefits

A Roth conversion increases your taxable income for the year, which can raise your Medicare premiums if you are on Medicare. The IRS uses your modified adjusted gross income from two years prior to set your premiums. A large conversion in 2024 will affect your 2026 Medicare premiums.

A conversion can also affect your tax credits if you are receiving them. If you are claiming the Earned Income Tax Credit, the American Opportunity Credit, or the Lifetime Learning Credit, a conversion that pushes your income above the threshold can reduce or eliminate the credit. The same applies to the Child Tax Credit and the Saver's Credit.

If you are subject to the Net Investment Income Tax (a 3.8% tax on investment income for high earners), a conversion can trigger or increase this tax. The threshold is $200,000 for single filers and $250,000 for married filing jointly. A conversion that pushes you over the threshold will add 3.8% to your tax bill on the excess.

Frequently Asked Questions

Can I undo a Roth conversion if I change my mind?

You can recharacterize a conversion, which means you move the money back to a traditional IRA and treat it as if the conversion never happened. However, recharacterization is only available if you file your tax return (including extensions) before the important date. You must file Form 8606 and Form 1040-X (amended return) to report the recharacterization. After the important date passes, you cannot undo the conversion.

Do I have to convert all my traditional IRA money at once?

No. You can convert part of your traditional IRA and leave the rest untouched. You can also do multiple conversions in the same year or spread conversions across several years. Each conversion is reported separately on Form 8606, and each has its own five-year holding period for the converted amount.

What if I convert money from a 401(k) instead of an IRA?

A conversion from a 401(k) or other workplace plan works the same way: you owe tax on the amount converted, and you report it on Form 8606. The pro-rata rule does not explore to workplace plans, so you can convert after-tax money from a 401(k) without affecting your traditional IRA. You must have separated from your employer or meet other conditions to convert from a 401(k) — ask your plan administrator what is allowed.

Will a conversion affect my Social Security benefits?

A Roth conversion does not directly affect Social Security benefits, but it increases your taxable income for the year, which can trigger taxation of your benefits if you are already receiving them. If your combined income (adjusted gross income plus tax-exempt interest plus half your Social Security) exceeds $25,000 (single) or $32,000 (married filing jointly), up to 85% of your benefits become taxable. A large conversion can push you over this threshold.