A Roth IRA conversion lets you move money from a traditional IRA or old workplace plan into a Roth IRA. You pay income tax on the converted amount now, and in exchange, qualified withdrawals in retirement are tax-free. Done at the right time, a conversion can save tens of thousands of dollars over a lifetime. Done carelessly, it can push you into a higher tax bracket and raise other costs. Here is how it works and how to decide if it fits your plan.
What Is a Roth IRA Conversion?
Traditional IRAs and most 401(k) contributions are made with pre-tax dollars. You get a tax break today, but every dollar you withdraw in retirement is taxed as ordinary income. Roth accounts work the opposite way: you pay tax up front, and qualified withdrawals, including all growth, come out tax-free.
A conversion moves pre-tax savings into a Roth account. The amount converted is added to your taxable income for that year. There is no income limit on conversions, so even high earners who cannot contribute to a Roth IRA directly can convert.
How to Do a Roth Conversion
- Open a Roth IRA at the same brokerage as your traditional IRA to keep things simple.
- Decide how much to convert. You can convert all of it or just part.
- Request a direct transfer (trustee-to-trustee) from the traditional IRA to the Roth IRA.
- Pay the tax from outside funds if possible, rather than from the converted money.
- Report the conversion on your tax return. Your custodian will send Form 1099-R, and you will file Form 8606.
If your money sits in an old employer plan, you can often roll it directly into a Roth IRA. Our guide on how to roll over a 401(k) walks through those steps.
The Tax Impact Explained
Suppose you are single, earn $70,000, and convert $30,000. Your taxable income for the year rises by $30,000, and that portion is taxed at your marginal rate. If part of it crosses into the next bracket, that slice is taxed at the higher rate.
A conversion can also cause ripple effects:
- Medicare premiums: Higher income can trigger income-related surcharges (IRMAA) on Medicare Part B and D, based on your income from two years earlier.
- Social Security taxation: More income can make a larger share of your benefits taxable.
- Health insurance subsidies: Marketplace premium tax credits are tied to income and may shrink.
- Other tax breaks: Some credits and deductions phase out as income rises.
Paying the tax from the IRA itself reduces the amount that grows tax-free. If you are under 59½, money withheld for taxes may also face a 10% early withdrawal penalty.
Key Rules You Must Know
The Five-Year Rule
Each conversion has its own five-year clock, starting January 1 of the conversion year. If you are under 59½ and withdraw converted principal before five years pass, you may owe a 10% penalty. Separately, earnings are only tax-free once you are 59½ and your first Roth IRA has been open at least five years.
The Pro-Rata Rule
If you hold both pre-tax and after-tax (nondeductible) money in traditional, SEP, or SIMPLE IRAs, you cannot convert only the after-tax portion. The IRS treats all your IRAs as one pool, and each conversion is taxed in proportion to the pre-tax share.
No Undo Button
Since 2018, conversions can no longer be recharacterized, or reversed. Once you convert, the tax bill is locked in, even if the market falls right afterward.
For official details on Roth rules, see the IRS Roth IRA page.
When a Roth Conversion Makes Sense
- Low-income years: A gap year, job loss, sabbatical, or early retirement before Social Security and required minimum distributions begin.
- Expecting higher future taxes: If you expect your income or tax rates to be higher later, paying tax now can win.
- Market downturns: Converting when account values are temporarily low means paying tax on a smaller amount, with the recovery happening tax-free.
- Reducing future RMDs: Roth IRAs have no required minimum distributions for the original owner, which can lower taxable income later in life.
- Estate planning: Heirs generally inherit Roth assets tax-free, though most must empty inherited accounts within 10 years.
When to Think Twice
- You are in a high bracket now and expect a much lower one in retirement.
- You would need to use IRA money to pay the tax.
- You may need the converted funds within five years.
- You plan to leave the account to charity, which can receive pre-tax money tax-free anyway.
- The added income would trigger Medicare surcharges or cost you valuable credits.
Partial Conversions: The Bracket-Filling Strategy
You do not have to convert everything at once. Many retirees convert a portion each year, just enough to “fill up” their current tax bracket without spilling into the next one. Spreading conversions over several years keeps the tax bill manageable and avoids a single high-income spike.
The best time to calculate this is late in the year, once you have a clear picture of your income. Remember that conversions must be completed by December 31 to count for that tax year.
Backdoor Roth IRA
High earners who exceed the income limit for direct Roth contributions often use a “backdoor” approach: contribute to a nondeductible traditional IRA, then convert it. This works cleanly only if you have little or no other pre-tax IRA money, because of the pro-rata rule.
Final Thoughts
A Roth IRA conversion is essentially a bet on tax rates: you pay a known tax today to avoid an unknown one later. It works best in low-income years, when you can pay the tax from outside savings, and when you will not need the money for at least five years. Run the numbers with a tax professional or fiduciary advisor before converting, since the decision cannot be reversed.
This article is for educational purposes only and is not tax or financial advice.
