How a Traditional IRA to Roth conversion works

A conversion moves money from a Traditional IRA directly into a Roth IRA. You instruct your IRA custodian (the bank, brokerage, or investment firm holding your account) to transfer funds from the Traditional account to the Roth account. The custodian handles the paperwork; you do not move the money yourself. The conversion is treated as a taxable event in the year it happens — you owe income tax on the amount converted, calculated at your ordinary tax rate.

The tax bill comes due when you file your tax return for that year. You do not pay it upfront; you report the conversion on Form 8606 (Nondeductible IRAs) when you file. If you cannot pay the tax from other income, you can use funds from the converted amount itself, though this reduces what actually moves into the Roth account.

There is no income limit for conversions. Anyone with a Traditional IRA can convert to a Roth, regardless of how much they earn. This differs from direct Roth contributions, which phase out at higher incomes.

Key Takeaways

  • You instruct your IRA custodian to transfer money from Traditional to Roth; the custodian does the work, not you.
  • The amount converted is taxed as ordinary income in the year of conversion, and you report it on Form 8606 when filing taxes.
  • If you have pre-tax contributions or deductible contributions in your Traditional IRA, the pro-rata rule applies — you cannot convert only the after-tax portion without triggering tax on a portion of the pre-tax money.
  • Conversions have no income limits, but the tax consequences depend on your total Traditional IRA balance and your tax bracket that year.
  • Once money is in the Roth, it grows tax-free and you can withdraw earnings penalty-free after age 59½ and five years of Roth ownership.

The pro-rata rule and why it matters

If you have both pre-tax money (from deductible contributions or rollovers) and after-tax money (from nondeductible contributions) in any Traditional IRA, the IRS pro-rata rule applies to your conversion. You cannot convert only the after-tax portion and leave the pre-tax portion behind. Instead, the IRS treats the conversion as coming proportionally from both pre-tax and after-tax money.

Example: You have a Traditional IRA with $80,000 in pre-tax contributions and $20,000 in after-tax contributions (total $100,000). You want to convert $20,000 to a Roth. The IRS treats this as 80 percent pre-tax and 20 percent after-tax, so $16,000 of the conversion is taxable and $4,000 is not. You owe tax on $16,000 even though you only converted the after-tax portion.

The pro-rata rule applies across all your Traditional IRAs, SEP IRAs, and SIMPLE IRAs combined. If you have multiple accounts, the IRS counts the total balance in all of them. You cannot isolate one account to avoid the rule.

Steps to convert your Traditional IRA to a Roth

Contact your IRA custodian and ask for a conversion form or request a direct trustee-to-trustee transfer. Most custodians have a form specifically for Roth conversions. You will need to provide the Roth IRA account number (if you already have one) or authorize the custodian to open a new Roth account in your name.

Specify the amount you want to convert — either a dollar amount or a percentage of the account. You can convert part of your Traditional IRA or all of it. The custodian will process the transfer, usually within one to two weeks, and send you a confirmation statement showing the amount moved and the date.

Keep the confirmation statement. You will need it when you file your tax return. The custodian will also send you a Form 1099-R (Distributions From IRAs, Pensions, Annuities, Insurance Contracts, and Other may have access to Retirement Plans) in January of the following year, reporting the conversion as a distribution.

Tax consequences and how to calculate what you owe

The amount you convert is added to your ordinary income for that tax year. If you convert $50,000 and your salary is $75,000, your taxable income for the year is treated as $125,000 (before deductions). You pay tax at your marginal rate — the rate that applies to your highest income bracket that year.

Your tax bill depends on your tax bracket. If you are in the 22 percent bracket, a $50,000 conversion costs roughly $11,000 in federal tax. If you are in the 24 percent bracket, it costs roughly $12,000. State income tax may apply on top of federal tax, depending on where you live.

You can use a tax calculator or work with a tax professional to estimate the impact before you convert. Some people convert in years when their income is lower (such as after retirement or a job loss) to pay less tax. Others convert gradually over several years to spread the tax bill across multiple years and stay in a lower bracket.

Timing: When conversions take effect and when taxes are due

A conversion is effective on the date the custodian completes the transfer. If you convert on June 15, the conversion is treated as happening on June 15 for tax purposes. You report it on your tax return for that calendar year, even if you do not file until the following April.

You do not pay tax when you convert. You pay tax when you file your return. If you convert in December, you still report it on your return for that year, filed the following April. If you realize you made a mistake, you have until the tax-filing deadline (including extensions) to undo the conversion through a process called a recharacterization, though recharacterization rules are limited as of 2018.

After the conversion, money in the Roth account begins its five-year holding period. You must own the Roth for five tax years before you can withdraw earnings without penalty, even if you are over 59½. The five-year clock starts January 1 of the year you convert.

Avoiding the backdoor Roth trap

A backdoor Roth is a conversion strategy where you contribute after-tax money to a Traditional IRA and immediately convert it to a Roth. This works only if you have no other pre-tax money in any Traditional IRA. If you do, the pro-rata rule applies and you will owe tax on a portion of the conversion.

Before you attempt a backdoor Roth, check your total Traditional IRA balance across all accounts. If you have a SEP IRA or SIMPLE IRA from a current or former employer, those balances count toward the pro-rata calculation. If the total is significant, a backdoor Roth may not be worth the tax cost.

Some people with large pre-tax IRA balances roll their Traditional IRAs into a 401(k) plan at their current employer (if the plan allows it) to remove the balance from the pro-rata calculation. This allows them to do a backdoor Roth without triggering tax. Check with your employer plan administrator to see if this option is available.

Frequently Asked Questions

Can I convert only part of my Traditional IRA?

Yes. You can convert any amount from $1 to your entire balance. The pro-rata rule still applies — if you have pre-tax and after-tax money mixed, a portion of any conversion will be taxable. You can convert in multiple transactions throughout the year if you want to spread the tax impact.

What happens if I convert and then the market drops?

You still owe tax on the amount you converted, based on the value on the conversion date. If the account value drops after conversion, you cannot undo the tax bill. However, you can recharacterize (undo) the conversion before the tax-filing deadline and reconvert later if you want to try again at a lower value — though this strategy has limitations and tax consequences. Consult a tax professional before attempting this.

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 different years. Each conversion is reported separately on your tax return.

What if I cannot afford to pay the tax bill?

You can use some of the converted funds to pay the tax, though this reduces the amount that actually ends up in the Roth. Alternatively, you can pay the tax from other income or savings. If you do not pay by the tax-filing deadline, the IRS will charge penalties and interest on the unpaid amount.

Does a conversion affect my Social Security or Medicare benefits?

A conversion increases your taxable income for that year, which can affect means-tested benefits like Medicare premiums or Medicaid. If you are close to income thresholds for these programs, a large conversion may push you into a higher premium bracket. Review your specific situation with a tax or benefits professional before converting.