How a Roth IRA Conversion Works and What Happens to Your Money

A Roth IRA conversion moves money from a traditional retirement account into a Roth IRA

A Roth IRA conversion is a transfer of money from a traditional IRA, SEP IRA, SIMPLE IRA, or a traditional 401(k) into a Roth IRA. You initiate the conversion yourself—it is not automatic. The money moves from one account to another, and you pay income tax on the amount converted in that tax year. After conversion, the money grows tax-free in the Roth account, and you can withdraw earnings without tax once you reach age 59½ and the account has been open for at least five years.

The core reason people convert is tax strategy. If you expect to be in a higher tax bracket later, or if you want to lock in current tax rates, converting now and paying tax at today's rate can save money over time. There is no income limit on who can convert—anyone with a traditional IRA or may be able to access employer plan can do it, regardless of how much they earn.

Key Takeaways

You pay ordinary income tax on the full amount converted in the year you convert it, which can push you into a higher tax bracket that same year.
After conversion, the money grows tax-free and you owe no tax on withdrawals after age 59½, as long as the account has been open at least five years.
You can convert any amount from a traditional IRA, SEP IRA, SIMPLE IRA, or traditional 401(k)—there is no income limit or annual cap on conversion size.
Conversions are permanent; you cannot undo them after the tax filing deadline, so the decision should account for your tax situation that year.
If you have both traditional and Roth IRAs, the IRS treats all your traditional IRAs as one account for tax purposes when you convert, which can create unexpected tax bills.

How the conversion process works step by step

You contact the financial institution that holds your traditional IRA or 401(k) and request a conversion to a Roth IRA. Some institutions call this a "Roth conversion" or "in-plan Roth conversion" if it is from a 401(k). You specify the dollar amount you want to convert. The institution transfers that amount directly to a Roth IRA you designate—either an existing Roth or a new one you open. The transfer typically completes within one to two weeks.

The institution reports the conversion to the IRS on Form 8606, which you file with your tax return. You calculate the tax you owe on the converted amount and pay it when you file. You do not have to pay the tax from the converted money itself; you can pay it from other income or savings. Many people pay the tax from outside funds to leave more money in the Roth account to grow.

If you convert from a 401(k), your employer's plan must allow in-plan conversions. Not all plans do. If yours does not, you can roll the 401(k) to a traditional IRA first, then convert from the IRA to a Roth. That two-step process takes a few weeks total but accomplishes the same result.

The tax bill you owe when you convert

The amount you convert is treated as ordinary income in the year you convert it. If you convert $50,000, you add $50,000 to your taxable income for that year. This can move you into a higher tax bracket and increase what you owe. It can also affect other tax items—Medicare premiums, the taxation of Social Security benefits, and may be able to access for certain deductions can all change based on your higher income that year.

The tax rate you pay depends on your overall income and filing status. If you are in the 22% federal bracket, you will owe roughly 22% federal tax on the conversion amount, plus any state income tax your state charges. Some states do not tax retirement income, so your state tax bill may be zero. You owe this tax whether or not you withdraw the converted money.

The timing of the conversion matters. If you convert late in the year, you have less time to plan for the tax bill. If you convert early, you can see how the conversion affects your full-year income and adjust other income sources if needed. Some people convert in years when their income is unusually low—for example, after retirement but before Social Security starts, or during a year of reduced business income.

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

If you own both a traditional IRA and a Roth IRA, the IRS applies the pro-rata rule when you convert. This rule treats all your traditional IRAs as a single account for tax purposes. If your traditional IRA holds $100,000 and you convert $25,000 to a Roth, the IRS calculates what percentage of your total traditional IRA balance is pre-tax money versus after-tax money (contributions you made with money you already paid tax on). You pay tax on that same percentage of the $25,000 you converted.

This rule creates a tax trap for many people. Suppose you have a $200,000 traditional IRA with $180,000 in pre-tax contributions and $20,000 in after-tax contributions. You want to convert only the $20,000 after-tax portion to avoid a tax bill. The pro-rata rule prevents this. When you convert $20,000, the IRS says 90% of your traditional IRA balance is pre-tax ($180,000 out of $200,000), so 90% of your conversion is taxable—$18,000 of the $20,000 you converted. You owe tax on $18,000 even though you only converted after-tax money.

The pro-rata rule applies across all traditional IRAs you own, including SEP IRAs and SIMPLE IRAs. It does not apply to 401(k)s, 403(b)s, or other employer plans. If you have a 401(k) with after-tax money in it, you can convert just that portion without triggering the pro-rata rule, because employer plans are not counted in the calculation.

What happens to your money after conversion

Once the money is in the Roth IRA, it grows tax-free. You can invest it in stocks, bonds, mutual funds, or other securities just as you would in any IRA. The earnings—the gains from investment growth—are never taxed as long as the money stays in the Roth account. You can withdraw your contributions (the amount you converted) at any time without tax or penalty. Withdrawals of earnings before age 59½ are subject to tax and a 10% penalty, with some exceptions.

After you reach age 59½ and the Roth IRA has been open for at least five years, you can withdraw both contributions and earnings tax-free. The five-year rule is per account, not per conversion. If you open a new Roth IRA to receive a conversion, that account's five-year clock starts the year you open it, not the year you convert money into it. If you already had a Roth IRA open, the five-year period started when you first opened that account.

Unlike traditional IRAs, Roth IRAs have no required minimum distributions during your lifetime. You can leave the money in the account indefinitely and pass it to heirs. Heirs who inherit a Roth IRA must withdraw the balance within ten years under current rules, but the withdrawals are still tax-free if the account met the five-year rule.

When a conversion makes sense and when it does not

A conversion is often worth considering if your income is temporarily low—you are between jobs, retired but not yet claiming Social Security, or running a business with a down year. Converting when your tax bracket is lower locks in a lower tax rate on that money. It also makes sense if you expect tax rates to rise in the future and want to pay tax now at today's rates.

A conversion is usually not worth it if you are in a high tax bracket this year and expect to be in a lower bracket in retirement. You would pay a high tax rate now to avoid a lower rate later, which costs you money. It also does not make sense if you cannot afford to pay the tax bill from outside funds. If you use the converted money itself to pay the tax, you lose the benefit of tax-free growth on that portion.

If you have a large traditional IRA and converting the whole amount would push you into a much higher tax bracket or trigger other tax consequences, a partial conversion—converting only part of the balance—may be a better choice. You can do multiple conversions over several years to spread the tax bill across years when your income is lower.

Undoing a conversion: the recharacterization window

You cannot undo a conversion after the tax filing deadline for that year. In the past, the IRS allowed recharacterizations—moving the money back to a traditional IRA—but this option ended in 2018. Once you convert, the conversion is permanent for tax purposes. If the market drops after you convert and the account value falls, you still owe tax on the original conversion amount, not the lower current value. This is one reason to think carefully before converting a large amount.

The only exception is if you made a conversion by mistake—for example, you converted from the wrong account or to the wrong person's Roth IRA. In that case, contact your financial institution immediately to correct the error. A true correction is different from a recharacterization and may be possible even after the tax deadline.

Frequently Asked Questions

Do I have to convert my entire traditional IRA at once?

No. You can convert any amount, from a small portion to the entire balance. You can do multiple partial conversions over different years. Each conversion is reported separately on your tax return, and you pay tax only on the amount converted that year.

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 the current value of the account. If you converted $50,000 and it is now worth $40,000, you still owe tax on $50,000. This is why some people convert when markets are down, so the account value is lower and the tax bill is smaller.

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

Some 401(k) plans allow direct in-plan conversions to a Roth. If yours does not, you can roll the 401(k) to a traditional IRA first, then convert from the IRA to a Roth. The two-step process takes longer but achieves the same result. Check with your plan administrator about whether your plan allows direct conversions.

Will a conversion affect my Social Security or Medicare premiums?

Yes. The conversion amount is added to your taxable income for the year, which can increase your Medicare premiums and change how much of your Social Security is taxed. If you are close to income thresholds for these programs, a large conversion could trigger higher costs. Factor this into your decision before converting.

Can I convert if I am still working and have a 401(k)?

Yes. You can convert a traditional IRA or an old 401(k) from a previous employer. You cannot convert from your current employer's 401(k) unless the plan allows in-plan conversions. Having an active 401(k) does not prevent you from converting other retirement accounts.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.