A Roth conversion is when you move money from a traditional retirement account into a Roth account and pay income tax on it that year

The basic mechanic is straightforward: you take funds sitting in a traditional IRA, SEP-IRA, straightforward IRA, or a 401(k) from a former employer, and you instruct your bank or brokerage to move that money into a Roth IRA in your name. The money arrives in the Roth account, but the IRS treats the transfer as income on your tax return for that year. You owe federal income tax on the full amount you moved — at whatever tax bracket you fall into that year.

The reason people do this is that money inside a Roth IRA grows tax-free forever, and you never pay tax on withdrawals in retirement. A traditional IRA, by contrast, grows tax-deferred (you do not pay tax while the money sits there), but you owe income tax on every dollar you withdraw after age 59½. A Roth conversion trades a tax bill today for tax-free withdrawals later.

You do not have to convert your entire balance. You can convert $5,000 one year and $15,000 the next year, or convert nothing at all. The choice is yours, and you can do a conversion in any year you want.

Key Takeaways

  • A Roth conversion means moving money from a traditional retirement account to a Roth IRA and paying income tax on the amount you move that year.
  • The tax bill is calculated at your ordinary income tax rate for that year, which depends on your total income and filing status.
  • After the conversion, the money grows tax-free in the Roth and you owe no tax on withdrawals after age 59½.
  • You can convert any amount, any year, but converting a large sum in one year may push you into a higher tax bracket and increase your tax bill.
  • Conversions are permanent — you cannot undo them, though you can reverse a conversion made in the same tax year by filing an amended return before the important date.

How the tax bill is calculated

When you convert $20,000 from a traditional IRA to a Roth, the IRS adds $20,000 to your taxable income for that year. If you earn $60,000 in wages and convert $20,000, your taxable income becomes $80,000. You then owe tax on that $80,000 at your normal tax rate.

The tax rate depends on your filing status and total income. For 2024, a single filer with $80,000 in taxable income owes roughly 22 percent federal tax on the conversion amount (though the exact rate depends on how much of your income falls in each bracket). A married couple filing jointly with the same income would owe roughly 12 percent. The higher your income, the higher the rate.

This is why timing matters. If you have a year with unusually low income — you took unpaid leave, you retired mid-year, your business had a down year — that year might be a good time to convert, because you will owe less tax. Conversely, if you had a big bonus or sold a rental property, that year is probably a bad time to convert, because the conversion will push you into a higher bracket.

The difference between a conversion and a contribution

A Roth contribution is money you earn and put into a Roth IRA directly. You pay tax on the money before it goes in (it comes from your after-tax paycheck), so you owe no additional tax. Roth contributions are limited to $7,000 per year if you are under 50, or $8,000 if you are 50 or older, and you can only contribute if your income is below a certain threshold.

A Roth conversion is moving money that already sits in a traditional account. There is no annual limit on how much you can convert, and there is no income limit — even high earners can convert. The tradeoff is that you owe income tax on the full amount in the year you convert.

Many people use conversions to get around the income limits on direct Roth contributions. If you earn too much to contribute directly to a Roth, you can contribute to a traditional IRA (which has no income limit) and then convert it to a Roth the same year or shortly after.

What happens to money after it converts

Once the money lands in your Roth IRA, it behaves like any other Roth money. You can invest it in stocks, bonds, mutual funds, or leave it in cash. It grows tax-free. When you reach age 59½ and have held the Roth account for at least five years, you can withdraw the money with no tax owed on the growth or the original conversion amount.

The five-year rule is important. If you convert $20,000 and then withdraw it two years later, you owe no tax on the $20,000 itself (you already paid that tax when you converted), but you do owe tax on any growth. If the $20,000 grew to $22,000, the $2,000 gain is taxable if you are under 59½. Once you turn 59½ and the five-year clock has run, both the original amount and all growth come out tax-free.

You are not required to withdraw the money at any age. Unlike traditional IRAs, which require you to start taking withdrawals at age 73, Roth IRAs have no required withdrawal age. The money can sit and grow for your entire life, and your heirs inherit it tax-free.

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

If you have both a traditional IRA and a Roth IRA, the IRS has a rule called the pro-rata rule that affects how much tax you owe on a conversion. The rule says that when you convert, you cannot pick and choose which dollars come from pre-tax money and which come from after-tax money. Instead, the IRS treats all your traditional and SEP and straightforward IRAs as one big pool, and the conversion is taxed based on the ratio of pre-tax to after-tax money in that pool.

Here is an example: suppose you have a traditional IRA with $90,000 in pre-tax contributions and $10,000 in after-tax contributions (money you put in but did not deduct). Your total is $100,000. If you convert $20,000, the IRS says that 90 percent of it ($18,000) is pre-tax and 10 percent ($2,000) is after-tax. You owe tax only on the $18,000. The $2,000 comes out tax-free because you already paid tax on it when you contributed.

This rule can make conversions expensive if you have a large pre-tax IRA balance. Many people avoid this by rolling their traditional IRA into a 401(k) at their current employer (if the plan allows it), which removes the IRA from the pro-rata calculation and lets them convert a smaller IRA with mostly after-tax money.

When a conversion might make sense

A conversion is often worth considering if you expect to be in a higher tax bracket in retirement than you are now. If you are in a low-income year and expect higher income later, converting at today's lower rate saves you tax over your lifetime. This is common for people who retire early and have low income for a few years before Social Security or pensions kick in.

A conversion can also make sense if you have a large traditional IRA and expect to leave it to heirs. Your heirs will owe income tax on withdrawals from a traditional IRA, but they can withdraw from an inherited Roth tax-free. Converting now trades your tax bill for tax-free withdrawals for your beneficiaries.

Conversions are less attractive if you are in a high tax bracket now and expect to be in a lower one in retirement, or if you are close to Medicare age and the conversion would push you into a higher income bracket (which affects Medicare premiums). Each situation is different, and the math depends on your specific numbers.

Conversions and Medicare premiums

A Roth conversion increases your taxable income for the year, which can affect your Medicare premiums if you are 65 or older. Medicare uses a figure called modified adjusted gross income (MAGI) to determine whether you pay the standard premium or a higher income-related premium. A large conversion can push you over the threshold and increase your premiums for that year and the following year.

This is a real cost that should factor into your decision. If a $50,000 conversion would cost you $2,000 in extra Medicare premiums, the true tax cost of the conversion is higher than just the income tax you owe. Talk to a tax professional if you are on Medicare and considering a conversion.

Frequently Asked Questions

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

You can reverse a conversion made in the same tax year by filing an amended return before the tax filing important date (usually April 15 of the following year, or October 15 if you file an extension). After the important date, the conversion is permanent and cannot be undone. This is why some people do a conversion early in the year — they have time to see how the market performs and reverse it if the account value drops.

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

No. You can convert any amount, any year. Some people convert a little each year to spread the tax bill across multiple years and stay in a lower bracket. Others convert a large amount in a single low-income year. The choice is yours.

What if I do not have the cash to pay the tax bill?

You can pay the tax from any source — your paycheck, savings, a loan. Some people pay the tax from the converted account itself, which means less money ends up in the Roth, but it is allowed. If you cannot pay the tax, you should not convert, because the IRS will expect payment when you file your return.

Does a conversion affect my Social Security benefits?

A conversion increases your taxable income, which can affect how much of your Social Security is taxed if you are already receiving benefits. The impact depends on your total income and filing status. If you are considering a conversion and already receive Social Security, check with a tax professional about the combined effect.

Can I convert a 401(k) directly to a Roth?

Yes, if you no longer work for the employer that sponsors the 401(k). You can roll the 401(k) into a Roth IRA directly, and you owe tax on the pre-tax portion. If you still work for the employer, most plans do not allow in-service conversions, though some do — check with your plan administrator. If your current employer's plan does allow it, you can convert while still employed.