Roth conversions: how they are taxed and when people look at them

A Roth conversion is a trade with your future self. You pay income tax now on money that has never been taxed, and in exchange that money can grow and come out of a Roth IRA later under the Roth rules. Whether the trade is a good one depends on numbers only you have. What we can do here is explain exactly how the tax works, the clock that starts, the mistakes that are hard to undo, and the kinds of years when people tend to run the numbers.

What a conversion is

You move money from a traditional IRA into a Roth IRA. The IRS treats it as a rollover, and it can be done three ways: a distribution you roll into the Roth no later than 60 days after you receive it, a trustee-to-trustee transfer, or a transfer between two accounts at the same custodian, which can be as simple as redesignating the account. ² Pre-tax money in an employer plan can also be rolled into a Roth IRA, and the income rule is the same. ²

There is no income limit on converting. The income test in section 408A(c)(3) limits how much you can contribute directly to a Roth IRA, and a qualified rollover contribution, which includes a conversion, is not counted against that contribution limit. ¹ That gap is what makes the backdoor Roth possible.

How the conversion is taxed

The converted amount is included in your gross income to the extent it would have been taxable if you had simply taken it out, and it is income for the year of the conversion. ² It is ordinary income, taxed at your regular rates, not at capital gains rates.

The part that is not taxed is your basis: any nondeductible contributions you made to traditional IRAs over the years. ² But you do not get to choose which dollars convert. All your traditional, SEP and SIMPLE IRAs are treated as one pot, measured at year end, and each conversion carries a proportional share of basis. We walk through that ratio step by step in the backdoor Roth article. The conversion and the ratio are reported on Form 8606, Part II. ⁴

One thing a conversion does not trigger: the additional tax on early distributions, as long as the money actually lands in the Roth. ²

Where the income lands in the brackets

Because it is ordinary income, a conversion stacks on top of everything else you earned that year. Each slice is taxed at the rate of the bracket it falls in. For 2026, a single filer's 22% bracket runs from $50,400 to $105,700 of taxable income, and the next bracket is 24%. For married couples filing jointly, the 22% bracket runs from $100,800 to $211,400.

That is why you hear people talk about "filling a bracket": converting only as much as fits under the top of the bracket you are already in, so none of it is taxed at the next rate up. It is a way of sizing a conversion, not a reason to do one.

No undo button

Before 2018 you could reverse a conversion by recharacterizing it. Not anymore. A conversion made in a tax year beginning after December 31, 2017 cannot be recharacterized back to a traditional IRA. ² Once the money moves, the income is on that year's return. If the market drops the week after, the tax is still figured on the amount you converted.

The clock on converted money

Each conversion starts its own five-year period, beginning with the first day of the tax year of the conversion. ³ If you take money out of the Roth within that period, the part attributable to the taxable amount you converted may be hit with the 10% additional tax on early distributions, unless an exception applies. ³ The statute says the same thing in its own words: section 72(t) applies to that portion as if it were includible in income. ¹

Two clarifications. This clock is about the additional tax, not regular income tax, since you already paid income tax on the conversion. And it is separate from the rule for qualified distributions of earnings, which this article does not cover.

Two avoidable mistakes

Withholding from the conversion itself. If you ask the custodian to withhold income tax out of the converted amount, the withheld part never reaches the Roth. Publication 590-A treats an amount you keep instead of rolling over as generally taxable, and it may be subject to the 10% additional tax on early distributions. ² Many people instead pay the tax from other savings, through wage withholding or estimated payments.

Forgetting the tax bill. A conversion is income with no paycheck withholding attached. The IRS notes you may have to increase your withholding or make estimated tax payments. ² If you convert mid-year, see how estimated taxes work.

A third rule worth knowing: amounts that must come out of a traditional IRA for the year under the required distribution rules, including the calendar year you reach age 73, cannot be converted. ² The required amount comes out first.

When people look at a conversion

These are the situations where people often run the numbers. None of them is a recommendation; they are where the arithmetic tends to get interesting.

• A low-income year. A gap between jobs, a sabbatical, the first years of retirement before other income starts. Lower taxable income leaves more room in the lower brackets.
• The years before required distributions. Roth IRAs have no required distributions while the owner is alive, and traditional IRAs do. ³ Some people convert in the window before those start.
• A drop in account value. The tax is figured on the value converted, so the same shares convert for fewer dollars of income when prices are down.
• Having basis already. If you hold nondeductible contributions, part of a conversion is tax-free, in the proportion the pro-rata ratio allows.

The question underneath every one of them is the same: is the rate you pay now lower than the rate you expect that money to face later, after counting what the tax payment itself costs you?