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) to a Roth account, the IRS treats that transfer as income on your tax return for that year. If you convert $50,000, you owe income tax on $50,000 — calculated at your ordinary income tax rate, which depends on your total income and your tax bracket.

The tax is due when you file your return for the year of the conversion. You do not pay it upfront to the IRA custodian; you report the conversion on your tax form and calculate what you owe. This is different from a withdrawal, where the custodian may withhold tax automatically.

The amount you convert is added to your other income for the year. If you earn $80,000 in salary and convert $50,000, your taxable income becomes $130,000 for that year. This can push you into a higher tax bracket, meaning some of the conversion is taxed at a higher rate than your salary.

Key Takeaways

  • A Roth conversion is taxed as ordinary income in the year you convert, at your regular income tax rate.
  • The conversion amount is added to your other income, which may push you into a higher tax bracket and increase the tax you owe.
  • You do not pay the tax to your IRA custodian; you report it on your tax return and pay it when you file.
  • The pro-rata rule means if you have both pre-tax and after-tax money in traditional IRAs, you cannot convert only the after-tax portion tax-free.
  • Some conversions may trigger Medicare premium increases or reduce tax credits you would otherwise receive.

How the pro-rata rule affects what you owe in tax

If you have money in a traditional IRA that came from pre-tax contributions (the kind that reduced your taxable income when you made them) and money that came from after-tax contributions (contributions you made with money you already paid tax on), the IRS does not let you pick which type to convert. Instead, it treats all your traditional IRA money as a single pool.

The pro-rata rule says that when you convert, a percentage of what you convert is treated as pre-tax money and a percentage as after-tax money, based on the ratio of each type in all your traditional IRAs combined. If 80 percent of your traditional IRA balance is pre-tax and 20 percent is after-tax, then 80 percent of your conversion is taxed as income and 20 percent is not.

This rule applies across all your traditional IRAs, SEP IRAs, and straightforward IRAs — not just the one account you are converting from. If you have $100,000 in a traditional IRA that is all pre-tax, and you convert $20,000 from it, all $20,000 is taxable. But if you also have a SEP IRA with $400,000 of pre-tax money, the pro-rata calculation treats your total traditional IRA balance as $500,000, and the conversion is still fully taxable because the after-tax portion is zero.

When a conversion can trigger the Medicare premium surcharge

A Roth conversion increases your Modified Adjusted Gross Income (MAGI), which is the number Medicare uses to calculate your premiums. If your MAGI crosses certain thresholds, your monthly Medicare Part B and Part D premiums jump significantly — sometimes by hundreds of dollars per month.

The surcharge is based on your MAGI from two years before. If you convert in 2024, Medicare looks at your 2022 MAGI to set your 2024 premiums. This two-year lag means a large conversion can surprise you with higher premiums years later, even if your income drops afterward.

The income thresholds vary by filing status and change each year. A financial professional who works with Medicare beneficiaries can help you estimate whether a conversion will trigger the surcharge in your situation. The surcharge is not a reason to avoid converting, but it is a cost to factor in.

How conversions interact with tax credits and deductions

A Roth conversion can reduce the value of tax credits you would otherwise receive, particularly the Earned Income Tax Credit, the Child Tax Credit, and education credits. It can also reduce deductions like the student loan interest deduction or the deduction for traditional IRA contributions.

These interactions happen because the conversion increases your MAGI or your Adjusted Gross Income (AGI), which are the numbers used to calculate whether you may have access to for these benefits and how much you receive. If a conversion pushes your income above a phase-out threshold, you lose part or all of a credit you would have received.

The impact varies widely depending on your income, family situation, and which credits explore to you. If you receive any of these credits, it is worth calculating the conversion's effect on them before you convert. Some people find that converting in a lower-income year — such as a year when they are between jobs — costs less in lost credits than converting in a higher-income year.

State income tax on conversions

Most states that have an income tax treat Roth conversions the same way the federal government does: as taxable income in the year of the conversion. You owe state income tax on the conversion amount at your state's tax rate.

A few states do not have an income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming), so residents of those states owe no state tax on a conversion, though they still owe federal tax.

Some states have special rules for retirees or for certain types of retirement income, but these rarely explore to conversions. If you live in a state with an income tax and are considering a large conversion, factor in the state tax as well as the federal tax.

Withholding and estimated tax payments

When you convert, your IRA custodian does not automatically withhold federal income tax the way an employer does from a paycheck. You are responsible for paying the tax when you file your return, or you can make estimated tax payments throughout the year to avoid a penalty.

If the conversion pushes your total tax bill significantly higher than what your employer is withholding (or what you have already paid in estimated taxes), you may owe a penalty for underpayment when you file. The penalty is small — usually a few percent of the shortfall — but you can avoid it by paying estimated taxes quarterly or by increasing withholding on other income.

Some people cover the tax bill by converting a slightly larger amount and having the custodian withhold tax on the extra amount, though this means you are converting more than you intended. Others straightforward set aside money from their paycheck or other income to pay the tax when they file.

How to report a conversion on your tax return

You report a Roth conversion on IRS Form 8606, "Nondeductible IRAs." Your IRA custodian sends you a Form 1099-R in January showing the conversion amount. You use this form and Form 8606 together to report the conversion on your tax return.

Form 8606 is where you calculate how much of the conversion is taxable under the pro-rata rule. If all your IRA money is pre-tax, the entire conversion is taxable and the form is straightforward. If you have after-tax money in IRAs, the form requires you to list all your traditional, SEP, and straightforward IRA balances as of December 31 of the conversion year to calculate the percentage that is taxable.

If you do not file Form 8606 when you should, the IRS may assess tax on the entire conversion amount, even the portion that should have been tax-free. If you made a conversion and did not receive a 1099-R or are unsure how to report it, contact your IRA custodian or a tax professional.

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 a limited time frame. The rules changed in 2018, and recharacterizations are now generally not allowed. If you converted and want to undo it, speak with a tax professional about your options in your specific situation.

Do I have to pay the tax from the conversion amount itself, or can I pay it from other money?

You can pay the tax from any source — your paycheck, savings, or other income. If you pay it from the converted IRA funds themselves, that extra amount is also subject to tax and counts toward the conversion. Most people pay the tax from outside money to maximize the amount that ends up in the Roth account.

What if I convert in December — do I owe tax that same year?

Yes. The conversion is taxable in the year it occurs, regardless of when you convert it. A conversion on December 31 is taxed in that year, not the next year. You report it on your tax return for that year and owe the tax when you file.

Does a conversion affect my Social Security benefits?

A Roth conversion can increase your Modified Adjusted Gross Income, which is used to calculate whether your Social Security benefits are taxable. If the conversion pushes your income above the threshold, a portion of your benefits becomes taxable. The effect depends on your total income and filing status.

What if I have a 401(k) and a traditional IRA — do I have to count both for the pro-rata rule?

The pro-rata rule applies to all your traditional IRAs, SEP IRAs, and straightforward IRAs, but not to 401(k)s, 403(b)s, or other employer plans. If you have after-tax money in a 401(k), you may be able to convert it separately without triggering the pro-rata rule. Speak with your plan administrator and a tax professional about your options.