How a Roth Conversion Moves Money From Your Traditional IRA to a Roth

The Basic Steps of a Roth Conversion

A Roth conversion is a taxable transfer: you move money from a traditional IRA (or another pre-tax retirement account) into a Roth IRA, and you pay income tax on the amount you convert in that same tax year. The money then grows tax-free in the Roth, and you can withdraw it tax-free in retirement, provided you follow the withdrawal rules.

The mechanics are straightforward. You contact your IRA custodian—the bank, brokerage, or investment firm holding your traditional IRA—and request a conversion. The custodian calculates the value of the assets you want to convert, transfers them to your Roth IRA (either at the same institution or at another), and reports the conversion to the IRS on Form 8606. You then report that same amount as taxable income on your tax return for that year.

The conversion itself is not a withdrawal. You are not taking the money out of retirement accounts entirely. You are moving it from one type of account to another, which is why the IRS treats it as a taxable event but not as an early withdrawal subject to the 10 percent penalty (in most cases).

Key Takeaways

• A Roth conversion requires you to pay income tax on the converted amount in the year you convert, but the money then grows and can be withdrawn tax-free later.
• You initiate a conversion by contacting your IRA custodian and requesting the transfer; the custodian handles the paperwork and reports it to the IRS.
• The conversion amount is added to your taxable income for that year, which may push you into a higher tax bracket or affect other tax benefits like Medicare premiums.
• You can convert as much or as little as you want from your traditional IRA in a single year, and you can do multiple conversions across different years.
• A conversion is different from a withdrawal: it does not trigger the 10 percent early withdrawal penalty if you are under 59½, but it does create a tax bill due by April 15 of the following year.

Why the Conversion Creates a Tax Bill

When you convert, you are moving pre-tax money into an account where withdrawals will eventually be tax-free. The IRS taxes the conversion to collect revenue on that money before it enters the tax-free Roth account. The tax is calculated at your ordinary income tax rate for that year.

If you convert $50,000 from a traditional IRA and you are in the 24 percent federal tax bracket, you owe approximately $12,000 in federal income tax on that conversion. State income tax may apply as well, depending on where you live. This tax is due when you file your tax return—typically by April 15 of the year following the conversion.

The tax bill does not come out of the Roth automatically. You pay it from other money—a bank account, a paycheck, or another source. If you use money from the IRA itself to pay the tax, that additional withdrawal is also taxable and may trigger the 10 percent penalty if you are under 59½.

How Conversions Affect Your Taxes That Year

The converted amount is added to your other income for the year, which can have ripple effects. If you are close to a tax bracket boundary, the conversion might push you into a higher bracket. If you are receiving Social Security, a large conversion can cause more of your benefits to become taxable. If you are on Medicare, it can increase your premiums for Parts B and D, because Medicare uses your modified adjusted gross income from two years prior to set those premiums.

This is why many people convert in years when their income is lower than usual—after retirement but before required minimum distributions begin, or in a year when they took a leave of absence or had lower business income. The lower your total income that year, the lower your tax rate on the conversion.

You can also split a conversion across multiple years to spread the tax impact. If you have $100,000 in a traditional IRA, you could convert $25,000 each year for four years instead of converting the whole amount at once. Each year's conversion is taxed separately at that year's income level.

The Pro-Rata Rule and Why It Matters

If you have both pre-tax and after-tax money in traditional IRAs, the IRS applies the pro-rata rule when you convert. This rule says you cannot cherry-pick only the after-tax portion to convert. Instead, the IRS treats all your traditional IRAs as a single pool, and your conversion is taxed based on the ratio of pre-tax to after-tax money across all your accounts.

Suppose you have $80,000 in pre-tax traditional IRA money and $20,000 in after-tax money (from non-deductible contributions), for a total of $100,000. If you convert $25,000, the IRS considers 80 percent of it to be pre-tax (taxable) and 20 percent to be after-tax (not taxable). So you pay tax on $20,000 of the conversion, not $25,000.

The pro-rata rule applies across all your traditional, SEP, and SIMPLE IRAs combined. It does not apply to employer plans like 401(k)s, which are treated separately. This is one reason some people roll a traditional IRA into a 401(k) before converting—it removes the IRA from the pro-rata calculation and allows them to convert only the pre-tax portion of a separate IRA.

Timing: When the Conversion Happens and When You Pay Tax

You can request a conversion at any time during the year. The conversion is complete when the money arrives in your Roth IRA, which usually takes three to five business days. You report the conversion on your tax return for the year in which it was completed, regardless of when you pay the tax.

If you convert on December 15, 2024, you report it on your 2024 tax return filed in 2025, and the tax is due by April 15, 2025. If you convert on January 5, 2025, you report it on your 2025 tax return filed in 2026, and the tax is due by April 15, 2026.

There is no deadline within the year to convert—you can do it in January or December and it counts for that year. However, you cannot undo a conversion after the tax year ends. The IRS eliminated the recharacterization rule in 2018, which means once a conversion is reported, it stays converted.

Conversions and the Backdoor Roth Strategy

A backdoor Roth is a specific type of conversion used by people whose income is too high to contribute directly to a Roth IRA. The strategy works like this: you contribute after-tax money to a traditional IRA (which has no income limit), then immediately convert it to a Roth. Because the money was after-tax, little or no tax is owed on the conversion.

The backdoor Roth is a conversion, but it is a conversion of after-tax money rather than pre-tax money. The same pro-rata rule applies, so if you have other pre-tax IRA balances, they will affect how much tax you owe on the backdoor conversion. Many people use the backdoor Roth as a way to fund a Roth IRA every year when they cannot contribute directly.

What Happens to Your Roth After Conversion

Once money is in your Roth IRA, it grows tax-free. You can invest it in stocks, bonds, mutual funds, or other securities, just as you would in a traditional IRA. You do not have to take required minimum distributions from a Roth during your lifetime, which means the money can stay invested and compound for decades.

You can withdraw your contributions (the after-tax money you put in) at any time without tax or penalty. You can withdraw earnings (the growth) tax-free if you are 59½ or older and the Roth has been open for at least five years. If you withdraw earnings before meeting those conditions, the earnings portion is taxable and may be subject to the 10 percent penalty.

The five-year rule is per Roth IRA, not per conversion. If you open a Roth and convert money into it, the five-year clock starts ticking. If you already have a Roth that is more than five years old, conversions into that Roth can be withdrawn as earnings immediately after the five-year mark, without waiting another five years.

Frequently Asked Questions

Can I convert part of my traditional IRA and leave the rest alone?

Yes. You can convert any amount you choose, from a small portion to the entire balance. Each conversion is a separate taxable event reported in the year it occurs. Many people convert gradually over several years to manage the tax impact.

What if I change my mind after I convert?

You cannot undo a conversion after the tax year ends. The recharacterization rule, which allowed this, was eliminated in 2018. Once you convert and report it on your tax return, the money stays in the Roth. Plan carefully before converting.

Do I have to convert my entire IRA at once?

No. You can convert as little or as much as you want in a single year, and you can do conversions in different years. Some people convert a fixed amount each year, while others convert only when their income is unusually low.

Will a conversion trigger the 10 percent early withdrawal penalty?

No, conversions are not subject to the 10 percent early withdrawal penalty, even if you are under 59½. However, if you use IRA money to pay the tax bill on the conversion, that additional withdrawal may be subject to the penalty.

How do I report a conversion on my tax return?

Your IRA custodian will send you Form 8606 showing the conversion amount. You file this form with your tax return. The converted amount is added to your taxable income for that year. If you have after-tax basis in your IRA, you will need to calculate the taxable portion using the pro-rata rule.