How a Roth conversion works

A Roth conversion means moving money from a traditional IRA to a Roth IRA. You withdraw funds from the traditional account and deposit them into a Roth account within 60 days. The IRS treats this as a taxable event — you owe income tax on the amount you convert in the year you do it, even though you are not withdrawing the money for personal use.

The conversion itself is straightforward: contact your IRA custodian (the bank, brokerage, or investment firm holding your account) and ask them to process a conversion. Many custodians have a form for this or let you do it online. Some allow a direct trustee-to-trustee transfer, which is cleaner because the money never touches your hands and the 60-day clock does not start.

After conversion, the money sits in your Roth account and grows tax-free. You pay no tax on the earnings, and you can withdraw them tax-free after age 59½ if the account has been open at least five years. This is the main reason people convert: to lock in tax-free growth on a larger balance.

Key Takeaways

  • You owe federal income tax on the full amount you convert in the year you convert it, calculated at your ordinary income tax rate.
  • Some states tax Roth conversions as income; others do not, so check your state's rules before converting a large amount.
  • If you have other traditional IRAs, SEP IRAs, or SIMPLE IRAs, the IRS counts all of them together when calculating your tax bill on the conversion.
  • A direct trustee-to-trustee transfer avoids the 60-day rollover window and is the safest method.
  • You can convert any amount at any time, but converting in a low-income year (like after retirement or a job loss) usually costs less in taxes.

Tax consequences of converting

The tax bill is the main cost of a conversion. If you convert $50,000, you owe income tax on $50,000 in that year. The tax rate depends on your total income for the year and your tax bracket. Someone in the 22% federal bracket pays roughly $11,000 in federal tax on a $50,000 conversion; someone in the 24% bracket pays roughly $12,000. State income tax applies on top of this in most states.

The IRS does not withhold tax automatically on conversions. You can ask your custodian to withhold a portion of the conversion amount to cover the tax bill, or you can pay the tax separately when you file your return. If you do not pay enough by the time you file, you may owe penalties and interest.

There is also a "pro-rata rule" that affects people with multiple traditional IRAs. If you have a traditional IRA with $100,000 and a SEP IRA with $50,000, and you convert $50,000 from the traditional IRA, the IRS treats the conversion as if you converted from both accounts proportionally. This means part of your conversion is taxed as if it came from pre-tax money (which it is), and you cannot simply convert the after-tax portion to avoid tax. Consult a tax professional before converting if you have multiple IRAs.

Timing: when to convert and when to wait

You can convert at any time during the year. Many people convert in years when their income is unusually low — after leaving a job, during a sabbatical, in early retirement before Social Security starts, or after a major loss. The lower your total income that year, the lower your tax bracket, and the less you owe on the conversion.

Some people convert gradually over several years to spread the tax bill across multiple years and stay in a lower bracket each year. Others convert a large amount in a single low-income year to get it done quickly. There is no rule against either approach.

If you are still working and earning a high salary, converting usually costs more in taxes because your income pushes you into a higher bracket. Waiting until retirement often makes sense. However, if you expect tax rates to rise in the future, converting now at today's rates might save money overall — this is a judgment call that depends on your predictions about future tax policy.

Step-by-step conversion process

First, decide how much to convert. You can convert part of your traditional IRA or all of it. There is no minimum or maximum, though converting a very large amount in one year will create a large tax bill.

Second, contact your IRA custodian and request a conversion. Ask whether they offer a direct trustee-to-trustee transfer (safest) or whether you need to take a distribution and roll it over yourself (riskier because of the 60-day window). If you go the rollover route, the custodian will send you a check or transfer the funds to your bank account. You then have 60 calendar days to deposit the full amount into your Roth IRA.

Third, make sure the money lands in a Roth IRA, not a traditional IRA or another account type. If you already have a Roth IRA, the money goes there. If you do not, you will need to open one first — this takes a few minutes online with any major brokerage or bank.

Fourth, report the conversion on your tax return. You will receive a Form 1099-R from your custodian showing the conversion amount. You report this on your return and pay the tax owed. If you had the custodian withhold tax, that reduces what you owe.

Who should and should not convert

Conversions make sense if you expect to be in a higher tax bracket in retirement than you are now, or if you want to reduce required minimum distributions (RMDs) later. Roth IRAs have no RMDs during your lifetime, so converting reduces the amount you must withdraw each year after age 73, which can lower your taxable income and preserve more money for heirs.

Conversions also make sense if you have after-tax money in a traditional IRA (money you contributed but did not deduct) and want to move it to a Roth without paying tax on it again. The pro-rata rule complicates this, so work with a tax professional.

Conversions usually do not make sense if you are in a very high tax bracket now and expect to be in a lower one in retirement. You would pay a large tax bill today to avoid a smaller one later. They also do not make sense if you need the money soon — the whole point is tax-free growth over decades, and if you withdraw the money within five years, you may owe tax and penalties on the earnings.

State tax considerations

Federal tax is only part of the bill. Some states tax Roth conversions as ordinary income. New York, California, and Illinois are among them. A few states — including Pennsylvania, Tennessee, and Texas — do not tax IRA income at all, so a conversion there costs no state tax.

If you live in a high-tax state and are considering a large conversion, the state tax can be substantial. A $100,000 conversion in California adds roughly $9,300 in state tax on top of federal tax. Some people who are planning to move to a lower-tax state time their conversion for after the move, though the IRS has rules about this — consult a tax professional if relocation is part of your plan.

Frequently Asked Questions

Can I undo a conversion if I change my mind?

Yes, through a process called a recharacterization. You must do this by the tax filing deadline (usually April 15 of the following year, or October 15 if you file an extension). The money goes back to a traditional IRA, and the conversion is treated as if it never happened. You do not owe tax on the conversion. However, recharacterizations are useful mainly if the account value drops after conversion — if it rises, you are better off leaving it in the Roth.

What if I convert and then need the money before age 59½?

You can withdraw the amount you converted (the principal) anytime without penalty or tax. You cannot withdraw the earnings without penalty until age 59½, unless an exception applies. This makes conversions less risky than they appear — you can access the converted amount if an emergency arises, though you lose the tax-free growth benefit.

Do conversions affect my Medicare premiums or Social Security taxes?

Yes. Conversions count as income for the year, which can raise your modified adjusted gross income (MAGI). This affects Medicare premiums (higher MAGI means higher premiums) and may trigger taxes on Social Security benefits. If you are near Medicare age or claiming Social Security soon, model the conversion's impact before proceeding.

Can I convert a traditional IRA if I am still working?

Yes. There is no age limit or income limit on conversions, and it does not matter whether you are employed. The only constraint is the tax bill — the higher your income that year, the more you owe.

What happens to the money I leave in my traditional IRA after a partial conversion?

It stays there and continues to grow tax-deferred. You still owe required minimum distributions starting at age 73. You can convert more of it later if you want, or leave it untouched. There is no deadline to convert the rest.