How a Traditional IRA Conversion Works

A Roth conversion means moving money from a Traditional IRA into a Roth IRA. You withdraw funds from the Traditional account and deposit them into the Roth within 60 days. The IRS treats this as a taxable event — you owe income tax on the amount converted in that tax year, calculated at your ordinary income tax rate.

The conversion itself is straightforward: contact your Traditional IRA custodian (your bank, brokerage, or investment firm), request a distribution, and either have them send a check to you or arrange a direct trustee-to-trustee transfer to your Roth IRA custodian. A trustee-to-trustee transfer is safer because the money never touches your hands and avoids the 60-day deadline risk.

You can convert any amount, any time. There is no income limit on conversions — even high earners who cannot contribute directly to a Roth can convert a Traditional IRA. You can also convert in multiple transactions throughout the year or do one large conversion.

Key Takeaways

  • You owe federal income tax on the full amount converted, calculated at your tax bracket for that year.
  • A trustee-to-trustee transfer (money moves directly between institutions) is safer than taking a distribution yourself, which has a 60-day deadline.
  • There is no income limit on conversions, and you can convert any amount at any time.
  • If you have other Traditional IRAs, SEP IRAs, or SIMPLE IRAs, the IRS counts all of them together when calculating the tax bill on a conversion.
  • You must report the conversion on your tax return; the IRS receives a form 1099-R from your custodian.

Understanding the Tax Bill

The tax you owe depends on how much you convert and your income that year. If you convert $50,000 and your tax bracket is 24%, you owe $12,000 in federal tax. State income tax may apply as well, depending on where you live.

The IRS requires you to pay this tax by April 15 of the following year when you file your return. You can pay it from other funds, or some people use part of the converted amount to cover the tax — though that reduces the money actually in the Roth. If you do not pay by the deadline, you face penalties and interest.

One complication: if you have a Traditional IRA, SEP IRA, or SIMPLE IRA, the IRS treats all of them as one account for tax purposes. If you convert $50,000 from one Traditional IRA but have $100,000 in another Traditional IRA, the tax is calculated on the $50,000 conversion but based on your total IRA balance of $150,000. This is called the pro-rata rule, and it can significantly increase your tax bill.

The Pro-Rata Rule and How It Affects Your Conversion

The pro-rata rule means the IRS counts all your Traditional, SEP, and SIMPLE IRAs together. If any of that money is pre-tax (deductible contributions), it counts toward the tax on your conversion.

Example: You have a $100,000 Traditional IRA with pre-tax money and a $50,000 Roth IRA. You convert $50,000 from the Traditional IRA. The IRS calculates: $100,000 pre-tax money divided by $150,000 total IRA money = 67% of your conversion is taxable. You owe tax on $33,500 of the $50,000 converted.

This rule catches many people off guard. If you want to convert but have old Traditional IRAs with pre-tax balances, you may want to roll those into your employer's 401(k) plan first (if your plan allows it). That removes them from the pro-rata calculation and can lower your conversion tax bill.

When to Convert and Tax Planning

The best time to convert depends on your income and tax situation. Many people convert in years when their income is lower than usual — after leaving a job, during retirement before Social Security starts, or in a year with large losses. Converting when you are in a lower tax bracket means paying less tax on the conversion.

Some people convert gradually over several years to spread the tax bill across multiple years and avoid jumping into a higher bracket. Others do one large conversion in a low-income year. There is no single right answer; it depends on your circumstances and your tax outlook.

If you are considering a conversion, talk to a tax professional before you do it. They can model your tax situation for the year and tell you whether converting makes sense and how much to convert.

Roth Conversion and Medicare Premiums

A conversion increases your income for that tax year, which can affect your Medicare premiums if you are on Medicare. The IRS uses your income from two years prior to set your premium. A large conversion in 2024 could raise your 2026 Medicare premiums.

This is another reason to talk to a tax professional before converting. They can calculate whether the long-term benefit of having money in a Roth (tax-free growth and withdrawals) outweighs the short-term cost of higher Medicare premiums.

After the Conversion: Waiting Periods and Withdrawals

Once money is in your Roth IRA, it follows Roth rules. You can withdraw contributions (the money you put in) at any time without tax or penalty. Earnings (investment growth) have restrictions: you must be 59½ and the account must be open for at least five tax years to withdraw earnings tax-free.

The five-year rule applies separately to each conversion. If you convert in 2024, that conversion has its own five-year clock. If you convert again in 2025, that conversion has a separate five-year clock. After five years from the conversion date, you can withdraw that specific conversion's earnings without penalty (though you still need to be 59½).

There is no required minimum distribution (RMD) from a Roth IRA during your lifetime. Money can stay in the account and grow tax-free for as long as you live, then pass to heirs.

Reporting the Conversion on Your Tax Return

Your IRA custodian sends you a Form 1099-R showing the amount distributed from your Traditional IRA. You report this on your tax return using Form 8606, which calculates how much of the conversion is taxable based on your total IRA balances.

If you do a trustee-to-trustee transfer, you still receive a 1099-R (it will show code "G" for a direct rollover). You still file Form 8606 to report the conversion, even though no tax was withheld.

Keep records of the conversion — the date, the amount, and confirmation from your custodian — for at least three years. The IRS can audit conversions, and you need documentation to prove what you converted and when.

Frequently Asked Questions

Can I undo a conversion if I change my mind?

Yes, through a process called a recharacterization. You can move the converted money back to a Traditional IRA by the tax filing deadline (usually October 15 of the following year if you file an extension). You must move the full amount plus any earnings it generated. This is useful if the market drops after you convert and you want to avoid the tax on a now-smaller amount.

What happens if I do not have enough money to pay the tax bill?

You still owe the tax by April 15. If you cannot pay in full, you can set up a payment plan with the IRS, but you will owe penalties and interest on the unpaid amount. Some people convert a smaller amount to keep the tax bill manageable, or they pay the tax from savings rather than from the converted funds.

Can I convert if I have a 401(k) at work?

Yes. Your 401(k) does not affect your ability to convert a Traditional IRA. However, if you have both a 401(k) and a Traditional IRA, the pro-rata rule still applies to the IRA conversion — it counts all your IRAs together, but not your 401(k).

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

No. You can convert part of it and leave the rest in the Traditional IRA. You can also do multiple conversions in the same year or spread conversions across several years. Each conversion is reported separately on your tax return.

What if I made nondeductible contributions to my Traditional IRA?

Nondeductible contributions are not taxed again when you convert. Form 8606 tracks your basis (the nondeductible money) and calculates how much of the conversion is actually taxable. Keep records of any nondeductible contributions you made, because the IRS needs to see them to verify your basis.