What a Roth conversion is

A Roth conversion is the act of moving money from a traditional IRA, SEP IRA, SIMPLE IRA, or a 401(k) into a Roth IRA. You are not transferring the account itself — you are moving the dollars and changing their tax status. Money in a traditional IRA grows tax-deferred, meaning you pay income tax when you withdraw it in retirement. Money in a Roth IRA grows tax-free, and you pay no income tax on withdrawals in retirement. A conversion trades a tax bill later for a tax bill now.

The conversion happens in one of two ways. You can ask your IRA custodian (the bank or brokerage holding your account) to transfer the money directly from your traditional IRA to your Roth IRA — this is called a direct rollover and is the simpler route. Or you can withdraw the money yourself, receive a check, and deposit it into your Roth IRA within 60 days — this is called an indirect rollover and carries more risk of error. Most people use the direct method.

Key Takeaways

  • A Roth conversion moves money from a tax-deferred account (traditional IRA or 401(k)) into a Roth IRA, where it grows tax-free.
  • You owe federal income tax on the full amount you convert in the year you convert it, calculated at your ordinary income tax rate.
  • The tax bill can push you into a higher tax bracket, which may also raise your Medicare premiums and affect other tax deductions.
  • You can convert any amount at any time, but the IRS limits how much you can contribute to a Roth IRA each year — conversions do not count toward that limit.
  • A direct rollover from your custodian is safer than withdrawing the money yourself, because you avoid the 60-day deadline and the 20 percent withholding that applies to indirect rollovers.

The immediate tax cost of converting

When you convert money from a traditional IRA to a Roth IRA, the IRS treats the conversion as income in that tax year. If you convert $50,000, you add $50,000 to your taxable income for the year. You owe federal income tax on that amount at your ordinary income tax rate — the same rate you pay on wages or salary.

Your tax rate depends on your total income and your filing status. If you are single and your income before the conversion puts you in the 22 percent bracket, the conversion might push you into the 24 percent bracket. If you are married filing jointly and your income is high, a large conversion could push you into the 32 percent or 35 percent bracket. The IRS will not bill you automatically — you report the conversion on your tax return when you file, and you owe the tax at that time.

This is why people often convert in years when their income is lower than usual: after a job loss, during retirement before Social Security starts, or in a year when they took a smaller bonus. The lower your total income that year, the lower your tax rate on the conversion.

Secondary costs: Medicare premiums and other deductions

A large conversion can raise your Medicare premiums if you are over 65 or approaching that age. Medicare uses a figure called modified adjusted gross income (MAGI) to set your Part B and Part D premiums. A conversion increases your MAGI, which can trigger higher premiums. The increase takes effect two years after the conversion year — so a 2024 conversion affects your 2026 premiums. If you are not yet on Medicare, this may not apply to you.

A conversion can also reduce or eliminate other tax deductions. If you claim the standard deduction, this usually does not matter. But if you itemize deductions — for charitable giving, state and local taxes, or mortgage interest — a higher income from a conversion can phase out some of those deductions. Some people also lose may be able to access for tax credits like the Earned Income Tax Credit or education credits if their income rises too much.

Before you convert, calculate your total tax bill for the year, including federal income tax, any state income tax, Medicare premium increases, and lost deductions. Some people find that the long-term tax savings from a Roth are worth the immediate cost. Others find that the immediate cost is too high and decide not to convert.

How much you can convert and when

There is no annual limit on how much you can convert from a traditional IRA to a Roth IRA. You can convert $10,000 one year and $100,000 the next year. The only limit is the amount you have in your traditional IRA, SEP IRA, or SIMPLE IRA accounts.

You can convert at any time during the year. Many people convert in December so they know their full-year income before deciding on the amount. Others convert in January of the following year, after they have filed their tax return and know exactly what their income was. There is no deadline — you can convert whenever it makes sense for your situation.

Conversions do not count toward the annual contribution limit for Roth IRAs. In 2024, you can contribute $7,000 per year to a Roth IRA (or $8,000 if you are 50 or older). You can convert $100,000 and still contribute $7,000 in the same year — they are separate rules. However, if you have a traditional IRA and you convert part of it, you cannot convert just the after-tax money and leave the pre-tax money behind. The IRS has a pro-rata rule that requires you to convert a proportional amount of pre-tax and after-tax money.

The direct rollover versus the indirect rollover

A direct rollover means you contact your IRA custodian and ask them to transfer the money directly to your Roth IRA custodian. You never touch the money. This is the safest method because there is no 60-day deadline, no withholding, and no risk that you will miss the deadline and owe a penalty.

An indirect rollover means you withdraw the money from your traditional IRA yourself and deposit it into your Roth IRA within 60 days. The IRS withholds 20 percent of the amount for federal income tax. If you convert $50,000, you receive $40,000 and the custodian sends $10,000 to the IRS. You then have 60 days to deposit the $40,000 into your Roth IRA. If you do not deposit it within 60 days, the IRS treats it as a withdrawal, not a conversion, and you owe income tax on the full $50,000 plus a 10 percent penalty if you are under 59½.

The 20 percent withholding is a major problem with indirect rollovers. If you want to convert $50,000, you need to deposit $50,000 into your Roth IRA to complete the conversion. But you only received $40,000. You have to come up with the other $10,000 from your own money to deposit it. If you do not, the $10,000 is treated as a withdrawal and you owe tax on it. Use a direct rollover whenever possible.

What happens if you change your mind

Until 2018, you could undo a Roth conversion by filing a tax return amendment — this was called a recharacterization. The Tax Cuts and Jobs Act eliminated recharacterizations for conversions made after December 31, 2017. You can no longer undo a conversion by amending your tax return.

If you convert and then the market drops, you are stuck with the conversion. You paid tax on $50,000, but your account is now worth $40,000. You cannot reverse it. This is one reason some people convert smaller amounts or convert in years when they expect the market to be stable.

You can still undo a regular contribution to a Roth IRA (money you put in, not money you converted) by requesting a return of contributions from your custodian. But conversions are permanent once the tax year ends.

Who typically converts and why

People convert for different reasons depending on their age and income. Someone who is retired and has little income that year might convert to move money into a tax-free account while their tax rate is low. Someone who expects to be in a higher tax bracket in the future might convert now to pay tax at today's rate. Someone who is self-employed and had a down year might convert to use up income room at a lower tax rate.

High-income earners sometimes convert to move money into a Roth because they are not allowed to contribute directly to a Roth IRA — the IRS phases out Roth contributions for people above a certain income. A conversion has no income limit, so a high earner can convert a traditional IRA to a Roth even if they cannot contribute directly.

People also convert to reduce their required minimum distributions (RMDs) in later years. Once you turn 73, the IRS requires you to withdraw a certain amount from your traditional IRA each year and pay tax on it. If you convert money to a Roth before you turn 73, that money is no longer in your traditional IRA, so your RMD is smaller. This can lower your taxable income in retirement and reduce your Medicare premiums.

Frequently Asked Questions

Can I convert if I have both a traditional IRA and a Roth IRA?

Yes, you can convert from your traditional IRA to your Roth IRA. But the pro-rata rule applies: if you have $100,000 in traditional IRAs and $20,000 of it is after-tax money, and you convert $50,000, then $40,000 of the conversion is pre-tax (and taxable) and $10,000 is after-tax (and not taxable). You cannot cherry-pick only the after-tax money.

What if I convert and then lose my job?

You still owe the tax on the conversion. The tax bill is due when you file your tax return, regardless of your employment status. If you cannot pay the tax, you can set up a payment plan with the IRS. Some people regret converting in a year when they later lost income, but the conversion itself cannot be undone.

Do I have to report a conversion on my tax return?

Yes. Your IRA custodian will send you a Form 1099-R showing the conversion. You report it on your tax return. If you do not report it, the IRS will notice the 1099-R and may send you a bill for unpaid tax plus interest and penalties.

Can I convert a 401(k) to a Roth IRA?

Yes, but only if you no longer work for the employer who sponsors the 401(k). If you still work there, most plans do not allow in-service conversions. Once you leave the job, you can roll your 401(k) into a traditional IRA and then convert it to a Roth IRA. You owe tax on the conversion the same way you would for a traditional IRA conversion.

What if the market drops after I convert?

You cannot undo the conversion or reduce the tax you owe. You paid tax on the full amount you converted, even though your account is now worth less. This is a real risk of converting. Some people convert smaller amounts or wait for market conditions they think are favorable before converting a large amount.