How a Roth Conversion Works and What Happens to Your Money

A Roth conversion moves money from a traditional retirement account into a Roth account

A Roth conversion is a transfer of money from a traditional IRA, SEP-IRA, straightforward IRA, or a traditional 401(k) into a Roth IRA. You withdraw the money from the traditional account and deposit it into the Roth account within 60 days. The IRS treats this as a taxable event in the year you do it — you owe income tax on the amount you convert, calculated at your ordinary tax rate for that year.

The reason people do this is to move money into an account where future growth and withdrawals are tax-free. Once money is in a Roth IRA, you pay no tax on the earnings, and you can withdraw both your contributions and the growth tax-free after age 59½, as long as the account has been open for at least five years. With a traditional account, you owe tax on withdrawals in retirement.

A conversion is voluntary — you choose when and how much to convert. It is different from a required distribution or a rollover after leaving a job. You can convert as much or as little as you want in a given year, but the tax bill arrives in that same tax year.

Key Takeaways

A Roth conversion requires you to pay income tax on the converted amount in the year you do it, at your full ordinary tax rate.
After conversion, the money grows tax-free in the Roth account, and you owe no tax on withdrawals after age 59½ if the account is at least five years old.
You can convert from a traditional IRA, SEP-IRA, straightforward IRA, or traditional 401(k), but not directly from an employer plan while you still work there.
The conversion must be completed within 60 days of the withdrawal, or the IRS treats it as a regular distribution subject to income tax and potentially a 10 percent early withdrawal penalty.

Which accounts you can convert from

You can convert from any pre-tax retirement account. This includes a traditional IRA, a SEP-IRA (used by self-employed people and small business owners), a straightforward IRA (used by employers with 100 or fewer employees), and a traditional 401(k) from a current or former employer.

If you still work for the employer that sponsors your 401(k), you usually cannot convert directly from that plan while employed. However, if you have left the job, you can roll the 401(k) into a traditional IRA first, then convert that IRA to a Roth. Some employers allow in-service conversions of 401(k) money while you are still employed, but this is less common — check your plan documents or ask your plan administrator.

You cannot convert from a Roth account that is already Roth. You also cannot convert from a Roth 401(k) to a Roth IRA using the conversion process — that is a different type of rollover.

The tax bill you owe when you convert

When you convert, the IRS counts the converted amount as ordinary income in that tax year. You owe federal income tax at your regular tax bracket rate. If you convert $50,000 and you are in the 24 percent federal tax bracket, you owe $12,000 in federal tax on that conversion (before any state tax).

The tax is due when you file your return for that year. You do not pay it upfront when you do the conversion. Many people set aside money from their paycheck or other income to cover the tax bill, rather than using the converted money itself to pay the tax — if you use the converted money to pay the tax, you have less money growing in the Roth account.

State income tax also applies in most states. A few states (including Florida, Texas, and Wyoming) have no state income tax, so residents there owe only federal tax on a conversion. The amount varies by state and by your income level within that state.

The 60-day window and what happens if you miss it

Once you withdraw money from the traditional account, you have 60 calendar days to deposit it into the Roth IRA. The 60 days starts on the day you receive the money, not the day you request the withdrawal.

If you do not deposit the money within 60 days, the IRS treats it as a regular distribution. You owe income tax on the full amount, and if you are under age 59½, you also owe a 10 percent early withdrawal penalty — on top of the income tax. This makes missing the important date expensive.

The 60-day rule applies once per year per person across all IRAs. If you do multiple conversions in one year, they all count toward this one-per-year limit. If you miss the important date on one conversion, you cannot do another IRA-to-IRA conversion for 12 months.

How the conversion affects your taxes that year

A conversion can push you into a higher tax bracket in the year you do it. If you convert $100,000 and your normal income is $75,000, your total taxable income for that year is $175,000. You may owe tax at a higher rate on some or all of the converted amount, depending on your bracket structure.

This is why some people do smaller conversions over multiple years — it spreads the tax bill across years and may keep them in a lower bracket each year. Others convert in years when their income is already low, such as after retirement or a job loss, to minimize the tax rate on the conversion.

A conversion also affects your Modified Adjusted Gross Income (MAGI), which can change whether you are allowed to contribute directly to a Roth IRA that same year. If your MAGI is too high, you cannot make a regular Roth contribution, but a conversion is not blocked by income limits — anyone can convert regardless of how much they earn.

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

If you have both a traditional IRA and a Roth IRA, and you also have money in a SEP-IRA or straightforward IRA, the pro-rata rule applies to any conversion you do. This rule says you cannot convert only the after-tax money in your traditional accounts — the IRS treats all your traditional, SEP, and straightforward IRAs as one pool for tax purposes.

For example, if you have $100,000 in a traditional IRA (all pre-tax) and $10,000 in a SEP-IRA (all pre-tax), and you want to convert $10,000, the IRS calculates what percentage of your total is pre-tax money. Since $110,000 is pre-tax out of $110,000 total, 100 percent of your conversion is taxable. You owe tax on the full $10,000.

If instead you had $100,000 pre-tax and $50,000 after-tax (non-deductible contributions), and you convert $10,000, the IRS says $6,667 of that conversion is pre-tax (and taxable) and $3,333 is after-tax (and not taxable). The pro-rata rule prevents you from cherry-picking only after-tax money to convert.

What happens to the money after conversion

Once the money is in the Roth IRA, it grows tax-free. Any interest, dividends, or capital gains earned on that money are not taxed each year, and you do not owe tax when you withdraw them later.

You can withdraw your contributions (the money you converted) at any time without tax or penalty. You can also withdraw the earnings tax-free if you are at least 59½ years old and the Roth account has been open for at least five tax years. If you withdraw earnings before age 59½ or before the five-year mark, you owe tax on the earnings and a 10 percent penalty.

Unlike a traditional IRA, a Roth IRA has no required minimum distributions (RMDs) during your lifetime. You can leave the money in the account as long as you want, and it continues to grow tax-free.

Frequently Asked Questions

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

You can recharacterize a conversion back to a traditional IRA, but only if you do it by the tax filing important date (including extensions) for the year of the conversion. This means you have until October 15 of the following year if you file an extension. After that important date, the conversion is permanent and cannot be reversed.

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 in the traditional account. Each conversion is separate, and you can do multiple conversions in different years. However, the pro-rata rule still applies to all your traditional IRAs combined in each year you convert.

What if I convert and then my income drops the next year?

You cannot change the tax you owe on a conversion based on income changes after the fact. The tax is locked in for the year you do the conversion. If you want to reverse it, you must recharacterize by the filing important date. Otherwise, you owe the tax you calculated when you filed.

Can I convert a 401(k) directly to a Roth without going through a traditional IRA first?

Yes, if your 401(k) plan allows it. This is called a direct Roth conversion or in-plan Roth conversion. Not all plans offer this option, so check with your plan administrator. If your plan does not allow it, you must roll the 401(k) to a traditional IRA first, then convert the IRA to a Roth.

Does a conversion count toward my annual IRA contribution limit?

No. Conversions are separate from regular contributions and do not count against the annual contribution limit. You can convert any amount in a year and still make a regular contribution up to the limit for that year (if you meet the income requirements for a Roth contribution).

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.