What happens when you convert money to a Roth

A Roth conversion means moving money from a traditional retirement account (like a traditional IRA or 401(k)) into a Roth IRA. You pay income tax on the amount you move in the year you move it, and then that money grows tax-free inside the Roth account forever. The IRS treats the conversion as a taxable event — you owe tax on it like it was income that year — but after you pay that tax, withdrawals come out tax-free in retirement.

The conversion itself is a single transaction: you instruct your financial institution to transfer the funds from the traditional account to the Roth account. The institution handles the paperwork and reports it to the IRS on Form 8606. You do not need permission from anyone to do this. You do need to report it on your tax return for that year.

Key Takeaways

  • You pay ordinary income tax on the full amount you convert in the year you convert it, calculated at your regular tax rate.
  • After you pay the tax, the money grows tax-free in the Roth account and you pay no tax on withdrawals in retirement.
  • The conversion counts as income for that tax year, which can affect other tax benefits like deductions or credits you claim.
  • You can convert any amount from a traditional IRA or 401(k), but there is no income limit — anyone can do a Roth conversion regardless of how much they earn.
  • The money must sit in the Roth account for five years before you can withdraw the earnings without penalty, though you can withdraw your contributions anytime.

How the tax bill works

When you convert $50,000 from a traditional IRA to a Roth IRA, you owe income tax on that $50,000 in the year of the conversion. The tax is calculated at your ordinary income tax rate — the same rate you pay on wages or salary. If you are in the 24% federal tax bracket, you owe roughly $12,000 in federal tax on a $50,000 conversion. State income tax may apply on top of that, depending on where you live.

The tax bill is due when you file your tax return for that year. You can pay it from the conversion funds themselves (which reduces the amount that ends up in the Roth), or you can pay it from other money you have. Most people pay it from outside the account so the full converted amount stays in the Roth to grow.

The conversion also counts as income for that year. This means it can push you into a higher tax bracket, reduce other deductions or credits you claim, or affect whether you owe the net investment income tax. Your tax situation that year matters — converting in a low-income year costs less in tax than converting in a high-income year.

The five-year rule and when you can withdraw

Money in a Roth IRA has two parts: contributions (money you put in) and earnings (growth). You can withdraw your contributions anytime, tax-free and penalty-free. You can withdraw the earnings only after the account has been open for five tax years and you meet one of these conditions: you are 59½ or older, you are disabled, you are a first-time homebuyer (up to $10,000 lifetime), or the account owner has died.

A conversion counts as a contribution for withdrawal purposes. If you convert $50,000, you can withdraw that $50,000 anytime without penalty. The earnings on that $50,000 are subject to the five-year rule. The five-year clock starts on January 1 of the year you make the conversion, not the date of the conversion itself. If you convert on December 31, 2024, the five years end on December 31, 2029.

If you withdraw earnings before five years have passed and before age 59½, you owe a 10% penalty on the earnings plus income tax. The contributions themselves are never penalized.

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

If you have both a traditional IRA and a Roth IRA, the IRS treats them as one account for conversion purposes. This is the pro-rata rule. It means you cannot convert just the after-tax money in your traditional IRA and leave the pre-tax money behind. You have to convert a proportional amount of both.

Here is an example: you have a traditional IRA with $100,000 in pre-tax money and $20,000 in after-tax money (contributions you made with no tax deduction). You want to convert only the $20,000 after-tax money. The IRS says no — you must convert a mix. The total is $120,000, so 83% is pre-tax and 17% is after-tax. If you convert $20,000, you are converting $16,600 of pre-tax money and $3,400 of after-tax money. You pay tax on the $16,600.

This rule applies to all your traditional IRAs, SEP IRAs, and SIMPLE IRAs combined. It does not apply to 401(k)s, 403(b)s, or other employer plans — those are separate. If you have an old 401(k) from a previous job, you can roll it into that employer's current plan (if allowed) or into a traditional IRA, and then convert from there.

How to actually do a conversion

Contact the financial institution that holds your traditional IRA or 401(k) and ask to convert funds to a Roth IRA. If you do not yet have a Roth IRA, you will need to open one first — you can open it at the same institution or a different one. The institution will give you a form to sign authorizing the transfer.

You can do a direct transfer (the institution moves the money directly from one account to another) or an indirect rollover (the institution sends you a check, and you deposit it into the Roth within 60 days). A direct transfer is simpler and avoids the risk of missing the 60-day deadline. Either way, the institution reports the conversion to the IRS on Form 1099-R.

You report the conversion on your tax return using Form 8606. This form tells the IRS how much you converted, how much was pre-tax versus after-tax, and how much tax you owe. If you do not file Form 8606, the IRS may treat the conversion as a distribution and charge you tax and penalties.

What happens if you change your mind

You can undo a conversion through a process called a recharacterization, but only under specific circumstances. If you converted and the account value dropped significantly before you filed your tax return, you can recharacterize (move the money back to the traditional IRA) and file an amended return. This is rare and requires acting before the tax filing deadline.

Once you file your tax return reporting the conversion, you generally cannot undo it. If you converted $50,000 and the account is now worth $40,000, you still owe tax on the full $50,000. This is why some people wait to see how the market performs before converting, or convert smaller amounts to spread the risk.

Frequently Asked Questions

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. However, the pro-rata rule still applies — if you have pre-tax and after-tax money mixed together, you cannot convert only the after-tax portion. You must convert a proportional mix of both.

What if I convert and then my income is higher than I expected that year?

You still owe tax on the full conversion amount at your actual tax rate for that year. The tax bill does not change based on what you expected. If the conversion pushed you into a higher bracket or reduced other deductions, you pay the higher tax. This is why some people convert in years when they know their income will be lower.

Can I convert money from my employer's 401(k)?

Only if your plan allows in-service distributions or if you have left that employer. If you are still working there, check your plan documents or ask your HR department. If you have left, you can roll the 401(k) into a traditional IRA and then convert from there. Some employers allow direct rollovers to a Roth 401(k) instead, which avoids the pro-rata rule.

What if I convert and then lose my job or have a big expense?

You still owe the tax on the conversion. The conversion is separate from your employment or personal circumstances. You cannot reverse it after you file your tax return. This is why it is important to make sure you have money set aside to pay the tax bill before you convert.

Does a conversion affect Social Security or Medicare?

Yes, the conversion counts as income for that year, which can affect your Social Security tax and Medicare premiums. If you are close to the income thresholds for these programs, a large conversion might push you over and increase what you pay. This is worth discussing with a tax professional if you are near retirement age.