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

When you move money from a traditional IRA, SEP-IRA, or SIMPLE IRA into a Roth IRA, the IRS treats that conversion as income on your tax return for that year. If you convert $50,000, you report $50,000 as additional taxable income. You owe federal income tax on it at your regular tax rate — the same rate you pay on wages or other income.

The tax bill arrives when you file your return the following spring, not when you move the money. If you convert in January 2024, you report it on your 2024 tax return, due in April 2025. The IRS does not withhold the tax automatically, so you may need to make a quarterly estimated tax payment or adjust your withholding to avoid a penalty.

State income tax applies too, in states that have it. The conversion is taxable at your state rate as well as federal.

Key Takeaways

  • You owe income tax on the full amount you convert in the year you convert it, at your regular tax bracket rate.
  • The tax is due when you file your return the following spring; the IRS does not withhold it automatically.
  • If you convert pre-tax money (traditional IRA funds), the entire conversion is taxable; if you convert after-tax money, only the earnings portion is taxed.
  • Money you withdraw from the Roth after conversion is never taxed again, and you can withdraw your contributions penalty-free at any time.
  • A large conversion can push you into a higher tax bracket and affect other tax benefits like Medicare premiums and Social Security taxation.

Pre-tax versus after-tax money: what gets taxed

Not all conversions are taxed the same way. It depends on what kind of money you are converting.

If you convert money from a traditional IRA — money you deducted from your income when you contributed it — the entire amount is taxable. You already got the tax break going in, so you pay it now going out.

If you convert money from a SEP-IRA or SIMPLE IRA, the same rule applies: the full amount is taxable, because those contributions were deducted.

If you have after-tax contributions in any of these accounts — money you put in without taking a deduction — only the earnings on that money are taxed. The contributions themselves are not. For example, if you contributed $10,000 after-tax and it grew to $12,000, you convert the whole $12,000 but only owe tax on the $2,000 in earnings.

The IRS uses a pro-rata rule if you have both pre-tax and after-tax money in the same account type. You cannot pick and choose which dollars to convert. If your traditional IRA is 80 percent pre-tax and 20 percent after-tax, then 80 percent of any conversion is taxable and 20 percent is not, regardless of which specific dollars you move.

How conversion size affects your tax bracket

A conversion can push you into a higher tax bracket in the year you do it. If you normally earn $75,000 and convert $50,000, you are reporting $125,000 in income that year. That extra $50,000 may be taxed at a higher rate than your usual income.

The size of the jump depends on your filing status and the tax brackets in effect that year. A married couple filing jointly has more room before hitting higher brackets than a single filer. Someone converting $20,000 might stay in the same bracket; someone converting $100,000 almost certainly will not.

This is why some people spread conversions across multiple years — converting $30,000 one year, $30,000 the next — to keep each year's income lower and avoid a steep bracket jump. Others do one large conversion in a year when their income is already low, like after retirement or a job loss.

Effects on Medicare premiums and Social Security taxation

A conversion can raise your reported income in ways that affect other benefits and costs. Medicare premiums are based on your income from two years prior. If you convert in 2024, your 2024 income affects your 2026 Medicare premiums. A large conversion can push you into a higher premium bracket.

Social Security benefits are also affected by income. If you are receiving Social Security and your income (including conversion income) exceeds certain thresholds, up to 85 percent of your benefits become taxable. This is separate from the tax on the conversion itself.

Some people time conversions to years when they know their income will be low — before they claim Social Security, or in a year when they are not working — to minimize these secondary effects.

What happens after the conversion: no more tax on withdrawals

Once money is in the Roth, you never pay income tax on it again, as long as you follow the rules. Earnings grow tax-free. When you withdraw money in retirement, it comes out tax-free.

You can withdraw your contributions (the money you converted) at any time, tax-free and penalty-free, even before age 59½. You can withdraw your earnings (the growth on that money) tax-free and penalty-free only after age 59½ and if the account has been open for at least five years.

This is the long-term benefit of paying the tax now: you lock in today's tax rate and avoid paying tax on years of future growth.

State taxes and special situations

Most states that have income tax tax Roth conversions the same way the federal government does. A few states — including Pennsylvania and Tennessee — do not tax retirement account withdrawals or conversions at all, which can make conversions cheaper in those states.

If you move to a different state after converting but before withdrawing, the state where you lived during the conversion is the one that taxes it. If you convert in New York and move to Florida (which has no income tax) the next year, you still owe New York tax on the conversion.

If you receive a large inheritance or have a year of unusually high income, a conversion that year may be more expensive than in a lower-income year. Some people wait for a better year rather than converting when income is high.

Frequently Asked Questions

Do I have to pay the tax all at once, or can I pay it over time?

You report the conversion as income on your tax return and owe the tax when you file. You cannot pay it in installments through the IRS as part of the conversion itself. However, if you owe more tax than you can pay by the filing deadline, you can set up a payment plan with the IRS for the total amount owed.

What if I convert and then change my mind?

You can undo a conversion through a process called a recharacterization, but only within certain time limits set by the IRS. If you recharacterize, the conversion is treated as if it never happened, and you do not owe tax on it. Rules around recharacterization change, so check current IRS guidance or speak with a tax professional about timing.

Can I use the money I convert to pay the tax bill?

Technically yes, but it is usually not a good idea. If you convert $50,000 and use $10,000 of it to pay the tax, you only have $40,000 left in the Roth. You still owe tax on the full $50,000 conversion, so you are paying tax on money that is no longer in the account. Most people pay the tax from other savings.

Does the conversion affect my tax deduction for traditional IRA contributions?

Yes. If you make a traditional IRA contribution and then convert part of it to a Roth in the same year, the pro-rata rule applies. The IRS treats all your traditional IRA money as one pool, so a conversion reduces the amount of new contributions you can deduct. This is one reason people sometimes convert in a different year than they contribute.

What if I have multiple IRAs?

The pro-rata rule applies across all your traditional, SEP, and SIMPLE IRAs combined. You cannot convert from one IRA and ignore the others. The IRS looks at your total balance in all three account types to calculate what portion is pre-tax and what portion is after-tax.