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

When you convert money from a traditional IRA to a Roth IRA, the IRS treats that conversion as income on your tax return for that year. If you convert $50,000, you owe income tax on $50,000 of additional income — calculated at your ordinary income tax rate, not at capital gains rates. The tax is due when you file your return for that year, typically by April 15 of the following year.

The converted amount gets added to your other income for the year. If you earn $80,000 from your job and convert $50,000, your taxable income becomes $130,000 for that year. This matters because higher income can push you into a higher tax bracket, meaning you may pay a higher percentage on some or all of your income.

You do not pay the tax from the Roth account itself. You pay it from other money — your paycheck, a savings account, or another source. If you use money from the IRA to pay the tax, that withdrawal counts as a separate taxable event and may trigger an early withdrawal penalty if you are under 59½.

Key Takeaways

  • The amount you convert becomes taxable income in the year you convert it, taxed at your ordinary income tax rate.
  • The conversion can push you into a higher tax bracket, increasing the tax on your conversion and potentially on your other income.
  • You must pay the tax from money outside the IRA; using IRA funds to pay creates a second taxable event.
  • After the conversion, money in the Roth grows tax-free and withdrawals after age 59½ are tax-free if the account is five years old.
  • The pro-rata rule means if you have both traditional and SEP or straightforward IRAs, the conversion is taxed based on the combined balance of all those accounts.

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

If you own both a traditional IRA and a Roth IRA, or a traditional IRA and a SEP-IRA or straightforward IRA, the IRS uses the pro-rata rule to calculate how much of your conversion is taxable. You cannot convert only the after-tax contributions and leave the pre-tax money behind.

Here is how it works: Add up the total balance of all your traditional IRAs, SEP-IRAs, and straightforward IRAs as of December 31 of the year you convert. Divide the amount of pre-tax money by that total. That percentage applies to your entire conversion. If you have $100,000 in a traditional IRA (all pre-tax) and $50,000 in a Roth IRA, and you convert $30,000, then $20,000 of that conversion is taxable (because two-thirds of your traditional accounts are pre-tax). The other $10,000 comes from after-tax contributions and is not taxed again.

This rule catches many people off guard. If you have a large traditional IRA balance and want to convert only a small amount, most of that small conversion will still be taxable. The only way to avoid the pro-rata rule is to roll the pre-tax money into a workplace plan like a 401(k) or 403(b), if your plan allows it. That removes it from the pro-rata calculation.

What happens to the money after it sits in your Roth

Once the money is in your Roth IRA and you have paid the conversion tax, future growth is tax-free. If your $50,000 conversion grows to $75,000 over ten years, you owe no tax on that $25,000 gain. This is the main reason people convert: to lock in tax-free growth on a larger balance.

Withdrawals from your Roth are tax-free after you turn 59½, but only if the account has been open for at least five years. The five-year clock starts on January 1 of the year you opened your first Roth IRA, not the year you converted. If you opened a Roth in 2020 and convert in 2025, the five-year requirement is already met. If you convert in 2025 and have never owned a Roth before, you must wait until 2030 to withdraw earnings tax-free.

The converted amount itself can be withdrawn at any time without penalty, even before 59½. You already paid tax on it when you converted. The earnings on that conversion are what the five-year rule protects.

How a conversion affects your tax bracket and other tax situations

Adding conversion income to your other income can push you into a higher tax bracket. If you earn $90,000 and convert $40,000, your taxable income is $130,000. Depending on your filing status and the year, this might move you from the 22% bracket into the 24% bracket. You pay 24% on the income that falls in that higher bracket, not on your entire conversion.

A conversion can also affect other tax benefits. Higher income can reduce or eliminate the child tax credit, the earned income tax credit, education credits, or the ability to deduct student loan interest. It can increase the amount of Social Security benefits that are taxable if you are retired. It can trigger the net investment income tax (3.8% on certain investment income) if your modified adjusted gross income exceeds the threshold for your filing status.

Some people spread conversions across multiple years to stay in a lower bracket. Others convert in a year when their income is unusually low — after a job loss, retirement, or a year with large deductible losses. Planning the timing and size of a conversion with a tax professional can reduce the total tax you owe.

State income tax on conversions

Most states that have an income tax treat Roth conversions the same way the federal government does: the converted amount is taxable income in the year you convert. A few states do not tax retirement income at all — including Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — so residents of those states owe no state tax on conversions, though they still owe federal tax.

If you move to a different state after a conversion, the state where you lived when you converted typically taxes that conversion. Some states have reciprocal agreements or special rules for people who move, so the rules vary. If you are planning a conversion and considering a move, a tax professional in your state can tell you how the timing affects your state tax bill.

The Form 8606 and how the IRS tracks your conversion

You report a Roth conversion on Form 8606, which you file with your federal tax return. This form tracks the conversion amount, the taxable portion, and your basis in the Roth (the amount you have already paid tax on). The IRS uses this form to make sure you do not pay tax twice on the same money and to enforce the five-year rule on withdrawals.

You must file Form 8606 even if none of the conversion is taxable — for example, if you converted only after-tax contributions. Failing to file it can result in penalties and complications if you later withdraw from the Roth. The form is straightforward if you have only one conversion in a year, but becomes more complex if you have multiple IRAs or multiple conversions.

Frequently Asked Questions

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

The tax is due by April 15 of the year after you convert, but you can pay it in installments through estimated tax payments during the year you convert. If you expect a large conversion, making quarterly estimated payments spreads the cost and may help you avoid an underpayment penalty. Your tax software or a tax professional can calculate the right amount to pay each quarter.

What if I convert and then the market drops — can I undo it?

Yes, through a process called a recharacterization. You can move the money back to a traditional IRA by the tax filing important date (including extensions) for that year. When you do, the conversion is treated as if it never happened, and you get back any tax you paid. However, you cannot recharacterize to avoid tax on a conversion that went up in value — the IRS allows recharacterization only if you do it before your return is filed.

Can I convert if I have a 401(k) at work?

Yes. Having a 401(k) does not prevent you from converting a traditional IRA to a Roth. However, the pro-rata rule still applies to your traditional IRAs. If you want to avoid the pro-rata rule, you can roll your traditional IRA into your 401(k) first (if your plan allows it), then convert only after-tax contributions. This is called the "backdoor Roth" strategy.

Will a conversion affect my Medicare premiums?

Possibly. Medicare premiums are based on your modified adjusted gross income from two years prior. A large conversion in one year can increase your premiums in the following two years. If you are approaching Medicare age, a tax professional can help you time conversions to minimize the impact on your premiums.

What if I convert and then need the money back?

You can withdraw the converted amount without penalty at any time, but you still owe the income tax you paid on the conversion. The tax does not come back. If you withdraw the earnings on that conversion before age 59½ and before the five-year rule is met, you owe income tax and a 10% penalty on the earnings only, not on the converted amount itself.