Roth Conversion

A Roth conversion is the process of moving money from a traditional IRA, 401(k), or other pre-tax retirement account into a Roth IRA or Roth account. You owe income tax on the converted amount in the year of conversion, but the money then grows tax-free in the Roth.

How it works

You can convert any amount from a traditional retirement account to a Roth. When you do, you owe income tax on the full converted amount in that year. Once in the Roth, the money grows tax-free forever.

Example: you have a traditional IRA with $100,000 (pre-tax). You convert $50,000 to Roth. You owe income tax on $50,000 at your marginal rate (say 24%), = $12,000 tax bill. The $50,000 is now in Roth and grows tax-free; the other $50,000 remains in traditional IRA.

Why convert?

Expect higher future tax rates. If you believe tax rates will be higher in retirement, converting now (at lower rates) saves taxes later.

Low-income year. If you have a low-income year (transition, sabbatical, early retirement), convert while in a low bracket. You pay less tax and move money to Roth.

Early retirement (before RMD). If you retire in your 50s, you have years before RMDs start at age 73. Converting during these years lets you reduce your traditional IRA before RMDs force withdrawals.

Diversify tax treatment. Having both traditional (taxable later) and Roth (tax-free later) accounts gives flexibility to manage tax liability in retirement.

Minimize IRMAA. Roth conversions trigger income in the conversion year but reduce traditional IRA balance, which lowers future RMDs and may lower Medicare premiums (IRMAA).

The pro-rata rule complication

If you have multiple traditional IRAs or a mix of pre-tax and after-tax balances, the pro-rata rule applies. When you convert, the IRS treats the conversion as coming from all your IRA accounts proportionally.

Example: you have $90,000 in a traditional IRA (pre-tax) and $10,000 in a traditional IRA (after-tax basis). You convert $10,000 from the after-tax account. The pro-rata rule says: $10,000 ÷ $100,000 = 10% is after-tax (not taxable) and 90% ($9,000) is pre-tax (taxable). You owe tax on $9,000, not $0.

Solution: Roll all pre-tax IRAs to a 401(k) before converting. This removes the pre-tax balance from the pro-rata calculation.

Timing and tax planning

Conversion ladders. Some people do small conversions over multiple years to keep their tax bracket low. Example: convert $20,000 per year for five years, keeping each year’s income in the 22% bracket rather than a single $100,000 conversion in a high bracket.

Early retirement conversions. If you retire at 50 before collecting Social Security or traditional IRA distributions, a few years of low taxable income are available for conversions.

Roth conversion windows. Windows of opportunity include job transitions (low income), sabbaticals, or business downturns.

After-tax 401(k) conversions

Some 401(k) plans allow conversions of after-tax contributions to Roth (see mega backdoor Roth). These convert immediately (no pro-rata rule applies, since the basis is already in the account) and are tax-free or low-tax.

Contribution base and elections

When you convert, the IRS does not care about “basis” — they treat the entire conversion as taxable unless you can prove otherwise (Form 8606). To minimize taxes on conversion, ensure your after-tax IRA contributions are properly reported (Form 8606 in the year of contribution) so they are not double-taxed on conversion.

Cannot undo since 2017

Before 2018, you could recharacterize (undo) a Roth conversion in a later year. This is no longer allowed. Once you convert, it is final for that tax year (though you can do an opposite conversion in a future year if desired).

See also