How a Roth conversion works in practice

A Roth conversion means moving money from a traditional IRA, SEP-IRA, straightforward IRA, or a 401(k) into a Roth IRA. You withdraw the money from the pre-tax account, pay income tax on the amount you convert in that tax year, and then deposit it into the Roth account. The money then grows tax-free, and you can withdraw it tax-free in retirement.

The conversion itself is not complicated — your bank or brokerage handles most of the paperwork. What takes planning is deciding how much to convert and understanding the tax bill that comes with it. The IRS requires you to report the conversion on your tax return, and you will owe federal income tax (and possibly state income tax) on the full amount you move, even if you do not actually withdraw the money in cash.

You can do a conversion any time during the year, and you can convert as much or as little as you want. There is no annual limit on how much you can convert, though the amount you convert counts as income for that tax year.

Key Takeaways

  • You initiate a conversion by contacting your current IRA or 401(k) provider and requesting a direct transfer or rollover to a Roth IRA at the same institution or a different one.
  • The full amount you convert is taxable as ordinary income in the year you convert it, so you will owe federal income tax and possibly state income tax on that amount.
  • You must report the conversion on your tax return using Form 8606, and your financial institution will send you a 1099-R form documenting the transaction.
  • If you have other traditional IRAs, SEP-IRAs, or straightforward IRAs, the IRS pro-rata rule means you cannot avoid taxes by converting only part of your retirement savings.
  • You have until the tax filing important date (normally April 15 of the following year, plus extensions) to undo a conversion if you change your mind, though this is called a recharacterization and has specific rules.

Contacting your financial institution to start the conversion

Call the customer service number on your IRA or 401(k) statement, or log into your online account and look for a "transfer" or "rollover" option. Tell the representative you want to convert funds to a Roth IRA. They will ask you how much you want to convert and where the money should go — either to a Roth IRA you already own at the same institution, or to a Roth IRA at a different bank or brokerage.

If you do not yet have a Roth IRA, you will need to open one before the conversion can complete. This takes a few minutes online and requires your Social Security number, address, and employment information. Once the Roth account exists, give your current provider the account details so they can send the money there.

Your provider will typically offer two methods: a direct transfer (also called a trustee-to-trustee transfer) or a rollover. A direct transfer is simpler — the money moves from one institution to the other without you handling it. A rollover means the money is sent to you first, and you then deposit it into the Roth IRA within 60 days. Direct transfer is safer because you avoid the risk of missing the 60-day important date, so request that if your provider offers it.

Understanding the tax bill and timing

The amount you convert becomes taxable income for that calendar year. If you convert $50,000, you will owe income tax on $50,000 as if it were wages you earned. The tax rate depends on your total income for the year and your tax bracket — your accountant or tax software can calculate the exact amount, but it is typically 22% to 37% of the conversion amount for most households.

You do not have to pay this tax from the converted money itself. Many people pay the tax bill from their regular checking account or savings so that the full converted amount can grow in the Roth. However, you can also have your provider withhold taxes from the conversion — if you do, the amount withheld reduces what actually moves into the Roth account.

The conversion is reported to the IRS on Form 1099-R, which your financial institution sends to you and the IRS by January 31 of the following year. You then report it on your own tax return using Form 8606. If you do not file Form 8606, the IRS may assume you owe tax on the conversion twice — once when you converted it and again when you withdraw it in retirement — so this form is important even though it is not complicated to fill out.

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

If you own a traditional IRA, SEP-IRA, or straightforward IRA in addition to the account you are converting from, the IRS pro-rata rule applies. This rule says you cannot convert only the after-tax money and leave the pre-tax money behind. Instead, the IRS treats all your IRAs as one pool, and the conversion is taxed based on the ratio of pre-tax to after-tax money across all accounts.

For example: suppose you have a traditional IRA with $90,000 in pre-tax contributions and $10,000 in after-tax contributions (total $100,000). You want to convert just the $10,000 after-tax portion to avoid taxes. The pro-rata rule prevents this. Instead, 90% of whatever you convert is treated as pre-tax (and therefore taxable), and 10% is treated as after-tax (and therefore not taxable). If you convert $10,000, you owe tax on $9,000.

The pro-rata rule applies across all traditional, SEP, and straightforward IRAs you own, but not to 401(k)s, 403(b)s, or other employer plans. If you have a 401(k) with after-tax money, you can sometimes roll that after-tax portion directly into a Roth without triggering the pro-rata rule — this is called an in-plan Roth conversion and requires your plan to allow it. Check with your employer's benefits department to see if your plan offers this option.

What happens after the conversion completes

Once the money arrives in your Roth IRA, it is there permanently and grows tax-free. You can invest it in stocks, bonds, mutual funds, or other securities just like any other Roth account. You do not have to take withdrawals at any age — Roth IRAs have no required minimum distributions during your lifetime, which is one reason people convert.

There is a five-year rule for Roth conversions: you cannot withdraw the converted amount tax-free until five tax years have passed since the year of the conversion. For example, if you convert in 2024, you can withdraw that converted money tax-free starting in 2029. The earnings on the conversion (the investment gains) have their own five-year clock and also require you to be age 59½ or meet another exception to withdraw them tax-free.

If you withdraw converted money before the five-year period ends, you will owe a 10% penalty on the amount withdrawn, plus income tax on any earnings. The five-year rule applies separately to each conversion, so if you convert again in 2025, that conversion has its own five-year clock starting in 2025.

Undoing a conversion if you change your mind

You can undo a Roth conversion by recharacterizing it — moving the money back to a traditional IRA. This is useful if the market drops after you convert and you want to avoid paying tax on money that is now worth less. You must complete the recharacterization by the tax filing important date for the year you converted, including extensions (normally October 15 if you file an extension).

To recharacterize, contact your Roth IRA provider and ask to recharacterize the conversion back to a traditional IRA. The provider will move the money back and send you a Form 8606 showing the recharacterization. You then report this on your tax return, and you will not owe tax on the conversion. If the converted money earned investment gains while it was in the Roth, those gains must come back with it, and you will owe tax on those gains even though you are undoing the conversion.

Once you recharacterize a conversion, you cannot convert that same money again until at least 30 days have passed. This is called the 30-day waiting period, and it applies per conversion, not per account.

Conversions from employer retirement plans

If you are converting from a 401(k), 403(b), or other employer plan, the process is similar but involves your employer's benefits department or plan administrator. Ask your HR or benefits team whether your plan allows in-service distributions or rollovers to an IRA. Some plans allow you to roll money out while you are still employed; others only allow it after you leave the job.

If your plan allows it, you can roll pre-tax money directly to a traditional IRA and after-tax money directly to a Roth IRA in a single transaction. This is cleaner than converting a traditional IRA because you avoid the pro-rata rule — the after-tax money goes straight to the Roth without being mixed with pre-tax money. Your plan administrator will handle the paperwork and send you the required tax forms.

If your plan does not allow in-service rollovers, you will have to wait until you leave the job, retire, or reach age 59½ (depending on your plan's rules) before you can roll the money out and convert it.

Frequently Asked Questions

Do I have to convert all my retirement savings at once?

No. You can convert as much or as little as you want, and you can do multiple conversions in the same year or spread them across different years. Many people convert smaller amounts over several years to keep their tax bill manageable and stay in a lower tax bracket.

What if I cannot afford to pay the tax bill?

You can pay the tax from any source — your checking account, savings, or even a loan. You do not have to pay it from the converted money itself. However, if you cannot pay the tax bill at all, you should reconsider whether to convert, because the tax is due when you file your return, regardless of whether you have the cash on hand.

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

It depends on your plan. Some plans allow in-service distributions or rollovers to an IRA while you are employed; others do not. Contact your HR or benefits department to ask whether your specific plan allows this. If it does not, you will have to wait until you leave the job or reach age 59½.

What is the difference between a conversion and a rollover?

A rollover moves money from one retirement account to another account of the same type (traditional IRA to traditional IRA, or 401(k) to traditional IRA). A conversion moves money from a pre-tax account to a Roth account, which triggers a tax bill. The terms are sometimes used loosely, so clarify with your provider what you are trying to do.

Will a Roth conversion affect my Social Security or Medicare benefits?

A Roth conversion increases your taxable income for that year, which can affect your Medicare premiums and the taxation of your Social Security benefits. If you are near retirement or already receiving benefits, consult a tax professional or financial advisor before converting, because the impact varies based on your specific situation.