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

When you convert money from a traditional IRA or 401(k) to a Roth IRA, the IRS treats that conversion as income on your tax return for that year. If you convert $50,000, you owe federal income tax on $50,000 of additional income — at your ordinary income tax rate, not the capital gains rate. This happens whether or not you actually withdraw the money to pay the tax.

The tax bill arrives when you file your return the following spring. You do not pay it upfront to the IRS; instead, you report the conversion amount on Form 8606 (Nondeductible IRAs) or Form 1040, and the tax is calculated as part of your total income for the year. If you did not have enough withheld from paychecks or other sources, you may owe a payment when you file.

The conversion itself does not trigger a 10% early withdrawal penalty, even if you are under 59½. However, if you withdraw the converted funds within five years, you may face that penalty on the earnings portion — a separate rule called the five-year holding period.

Key Takeaways

  • The full amount you convert counts as ordinary income in the year of conversion, taxed at your regular income tax bracket.
  • You owe tax on the conversion even if you do not withdraw cash to pay it, which can create a cash flow problem if you are not prepared.
  • If you have both pre-tax and after-tax money in traditional IRAs, the IRS pro-rata rule requires you to pay tax on a portion of every conversion, not just the after-tax portion.
  • Conversions in years when your income is lower (retirement, sabbatical, job loss) result in a smaller tax bill than conversions during high-income years.
  • State income tax applies to conversions in most states, adding to your total tax burden beyond the federal amount.

How the pro-rata rule affects your tax bill

If you own any traditional IRAs with pre-tax money in them — money you deducted when you contributed it — the IRS pro-rata rule applies. This rule says you cannot convert only the after-tax portion and leave the pre-tax portion behind. Instead, you must treat every dollar you convert as a proportional mix of pre-tax and after-tax money.

Here is the math: Suppose you have $100,000 in a traditional IRA, of which $80,000 is pre-tax and $20,000 is after-tax. If you convert $50,000, the IRS says 80% of it ($40,000) is pre-tax and 20% of it ($10,000) is after-tax. You owe income tax on the $40,000 pre-tax portion only. The $10,000 after-tax portion is not taxed again.

The pro-rata rule applies to all your traditional IRAs combined, not to each account separately. If you have IRAs at three different banks, the IRS counts the total balance across all three when calculating the ratio. This is a common surprise: people think they can convert one small after-tax IRA while ignoring a large pre-tax IRA elsewhere, but the rule prevents that strategy.

State income tax on conversions

Most states tax Roth conversions as ordinary income, just as the federal government does. Your state tax rate applies to the conversion amount, added on top of your federal tax bill. A few states — including Pennsylvania, Illinois, and New Hampshire — do not tax IRA distributions or conversions, so residents of those states owe only federal tax.

If you live in a high-income-tax state like California, New York, or Oregon, the state portion of your conversion tax can be substantial. A $50,000 conversion in California, for example, could trigger $5,000 to $10,000 in state income tax depending on your bracket, on top of federal tax. This is worth calculating before you convert, especially if you are on the edge of a tax bracket.

Some people who are retired or semi-retired consider moving to a no-tax state before converting, then moving back later. This is legal, but the IRS requires you to establish genuine residency — not just claim it on paper. You typically need to spend more than half the year in the new state and show other signs of permanent intent (driver's license, voter registration, property ownership).

When you owe tax on earnings within the Roth

Once money is inside the Roth IRA, it grows tax-free. You do not owe tax on the earnings that accumulate after the conversion. However, if you withdraw those earnings before age 59½ and before the five-year holding period ends, you owe income tax on the earnings plus a 10% penalty.

The five-year holding period is separate for each conversion. If you convert in 2024, the five-year clock runs until the end of 2028. If you convert again in 2025, that conversion has its own five-year clock running until the end of 2029. You can withdraw the original converted amount (the principal) anytime without penalty, but the earnings are locked until the five-year period ends.

This rule catches people who convert, then need the money back quickly. If you convert $50,000 and it grows to $55,000, you can withdraw the $50,000 without penalty, but the $5,000 in earnings is subject to tax and penalty if you withdraw it before five years pass and you are under 59½.

How to estimate your tax bill before converting

Before you convert, calculate what your total income will be for the year, including the conversion amount. Add up wages, self-employment income, investment income, Social Security (if applicable), and the conversion amount. That total determines your tax bracket and your effective tax rate.

Use the 2024 or 2025 tax tables (depending on the year you are converting) to find your bracket. If you are single and your total income lands in the 22% bracket, roughly 22 cents of every converted dollar goes to federal tax. Add your state rate on top. Multiply the conversion amount by that combined rate to get a rough estimate.

A more precise calculation requires knowing your exact filing status, deductions, and credits, which is why many people run the numbers with a tax professional before converting. Some people convert in years when they know their income will be lower — a sabbatical year, a year of job loss, or early retirement — to reduce the tax hit.

Withholding and estimated tax payments

When you convert, you can ask the financial institution holding your IRA to withhold federal income tax from the conversion amount. If you convert $50,000 and request 24% withholding, they will send $12,000 to the IRS and you will receive $38,000. This reduces the amount of tax you owe when you file, but it does not eliminate it if your actual tax rate is higher than 24%.

If you do not have enough tax withheld during the year, you may owe estimated tax payments to avoid an underpayment penalty. The IRS charges interest on taxes paid late, even if you pay them when you file your return in April. If you know you will owe a large amount from a conversion, paying estimated tax quarterly (or in one lump sum before year-end) avoids this penalty.

Some people pay the conversion tax from non-IRA funds — a savings account, a paycheck, or a loan — rather than having it withheld from the conversion itself. This keeps more money inside the Roth to grow tax-free, but it requires having cash available to cover the tax bill.

Conversions and Medicare premiums

A large conversion can push your income high enough to trigger higher Medicare premiums if you are on Medicare. The IRS uses your Modified Adjusted Gross Income (MAGI) from two years prior to set your premium. A conversion in 2024 affects your 2026 Medicare premiums.

If your MAGI crosses certain thresholds, you pay an Income-Related Monthly Adjustment Amount (IRMAA) on top of your regular Medicare Part B and Part D premiums. For 2024, single filers with MAGI over $97,000 begin paying surcharges; married couples filing jointly pay surcharges starting at $194,000. A large conversion can push you into a higher surcharge bracket, costing hundreds of dollars per month in additional premiums.

This is a reason to spread conversions over multiple years if possible, or to convert in a year when your other income is already low. It is also a reason to run the numbers with someone familiar with both tax and Medicare rules before converting.

Frequently Asked Questions

Do I have to pay the conversion tax from the converted money itself?

No. You can pay the tax from any source — savings, a paycheck, a loan, or other funds. Many people pay from outside sources to keep more money growing inside the Roth. However, if you pay from the converted IRA itself, that reduces the amount that ends up in the Roth and counts as a withdrawal.

What if I convert and then the market drops — do I still owe tax on the original amount?

Yes. You owe tax on the amount you converted, not on what it is worth when you file your return. If you convert $50,000 and it drops to $40,000 by tax time, you still owe tax on $50,000. This is why some people convert when markets are down — the tax bill is the same, but you own more shares for that tax cost.

Can I undo a conversion if I change my mind?

You can reverse a conversion through a process called a recharacterization, but only within certain time limits and under specific circumstances. The rules changed in 2018 and are now more restrictive. Consult a tax professional if you are considering this option.

Does a conversion count as income for purposes of financial aid or other benefits?

Yes, the conversion amount is counted as income in the year it occurs. This can affect your may be able to access for need-based financial aid, subsidies, or other income-tested benefits. If you are planning to apply for aid, consider the timing of any conversion carefully.