For a standard backdoor Roth conversion, the tax withholding notice from your custodian should be declined. The contribution you’re converting is after-tax money, so the conversion itself usually generates little or no taxable income, and any dollars withheld are money you’ll wait months to recover as a refund while permanently losing that Roth contribution room for the year.
Why the Notice Shows Up at All
Federal law treats every Roth conversion as a distribution from your traditional IRA followed by a deposit into the Roth. Because the IRS classifies it as a distribution, the custodian has to follow the withholding rules that apply to any retirement plan payout and offer you the chance to have tax taken out before the money moves.1Office of the Law Revision Counsel. 26 U.S. Code 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income The custodian has no way to know whether your particular conversion will produce a tax bill, so the notice goes out to everyone.
The withholding election is separate from the conversion itself. It doesn’t affect whether you can convert or how much. It only decides whether a piece of the money is diverted to the IRS on the way, or the full balance lands in your Roth intact.
The 10% Default and How to Decline
Do nothing with the notice and the custodian withholds 10% and sends it to the IRS on your behalf.1Office of the Law Revision Counsel. 26 U.S. Code 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income On a $7,500 conversion, that’s $750 to the government and $6,750 to your Roth.
You have the legal right to decline. The same statute that sets the 10% default allows you to opt out through a written or electronic election.1Office of the Law Revision Counsel. 26 U.S. Code 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income On most custodians’ platforms, that means checking a box in the conversion workflow to elect no federal income tax withholding. Check it and the full balance transfers.
Why Declining Is Usually the Right Call
A backdoor Roth works because you contribute after-tax money to a traditional IRA (a non-deductible contribution) and then convert it. If you have no other pre-tax IRA balances, the conversion generates zero taxable income. You’re moving money you already paid tax on into a different account type. There’s nothing to prepay.
Having 10% withheld in that situation means lending the IRS $750 interest-free until you file and get it refunded. The bigger cost is what happens to your Roth space. For 2026, the IRA contribution limit is $7,500, or $8,600 if you’re 50 or older.2Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500 If only $6,750 reaches the Roth, you can’t top it back up with the missing $750 later. You’ve already used your contribution room for the year. Over decades, that missing $750 of tax-free compounding can turn into thousands.
The conversion itself is also exempt from the 10% early withdrawal penalty that normally applies to IRA distributions before age 59½. The statute governing Roth conversions says the early distribution penalty “shall not apply” to amounts converted from a traditional IRA to a Roth.3Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs The concern that withholding triggers a separate penalty is misplaced for most backdoor conversions. The real cost is the lost Roth space.
When Withholding Might Actually Make Sense
If you have significant pre-tax money in other traditional, SEP, or SIMPLE IRAs, your conversion will produce taxable income because of the pro-rata rule. Some people in that situation prefer to have taxes withheld so they don’t face a large bill at filing. Even then, most tax professionals recommend paying the tax from a separate checking or savings account rather than reducing the amount that reaches the Roth. Every dollar inside the Roth grows tax-free, so funding the tax bill from outside the retirement system preserves more long-term value.
If Withholding Already Happened
For an indirect conversion, where you receive a check and deposit it into the Roth yourself, you generally have 60 days to complete the rollover by making up the withheld amount out of pocket. Convert $7,500 with $750 withheld, deposit the full $7,500 into the Roth using $750 from savings, and the $750 the IRS already received shows up as a credit when you file. For direct trustee-to-trustee conversions the transfer happens internally with no 60-day window, so whatever was withheld is gone from the conversion. That’s why checking the opt-out box before the transfer matters.
The Pro-Rata Rule Is Why the Answer Can Shift
The backdoor Roth works cleanly only when you have no pre-tax money in any traditional, SEP, or SIMPLE IRA. The IRS treats all your non-Roth IRAs as a single pool when calculating how much of a conversion is taxable, regardless of how many accounts you hold or which institutions they’re at.
Divide your total non-deductible contributions across all traditional IRAs by the total balance of all your non-Roth IRAs. That percentage is the tax-free share of your conversion. The rest is taxable income.
If you made a $7,500 non-deductible contribution and that’s the only money in any traditional IRA, 100% of the conversion is tax-free. If you also have $67,500 in a rollover IRA from a previous employer, your total IRA balance is $75,000, of which $7,500 (10%) is after-tax. Only 10% of your conversion escapes tax. Convert $7,500 and $6,750 becomes taxable income at your marginal rate, which can range from 10% to 37% depending on your total income.4Internal Revenue Service. Federal Income Tax Rates and Brackets
The pro-rata calculation runs on Form 8606, which tracks your non-deductible IRA basis year to year.5Internal Revenue Service. 2025 Form 8606 The IRS uses the total value of all your traditional IRAs on December 31 of the conversion year, not the date of the conversion. Rolling pre-tax IRA money into an employer 401(k) before year-end is one way to clear the deck.
A Boundary: 401(k) Indirect Rollovers Are Different
The 10% optional withholding applies to IRA-to-Roth conversions. If you’re rolling money from an employer plan like a 401(k) and taking an indirect distribution (the check comes to you first), a separate rule imposes 20% mandatory withholding that you cannot waive unless the funds go directly to the receiving plan.6eCFR. 26 CFR 31.3405(c)-1 – Withholding on Eligible Rollover Distributions For a standard backdoor Roth, traditional IRA to Roth IRA at the same institution, you’re dealing with the 10% default and you can decline it.
State Withholding Follows a Separate Election
The federal notice isn’t the only one you may see. If you live in a state with income tax, your custodian may apply state withholding based on your address. Each state sets its own rules. Some let you opt out the same way you opt out federally. Others mandate withholding at a fixed rate and give you no choice, with a handful of states requiring between 3.5% and 5% on IRA distributions regardless of your preference.
If you live in a state with no income tax, this isn’t a concern. Otherwise, look for a separate state withholding election in the same workflow. The logic for declining is the same: if the conversion generates no taxable income at the state level, having money withheld just delays your refund.
File Form 8606 Every Year You Contribute or Convert
Every backdoor Roth conversion requires Form 8606 with your tax return. The form reports your non-deductible contribution to the traditional IRA and calculates the taxable portion of the conversion. It’s how you prove the contribution was after-tax money, which is what makes the conversion tax-free or mostly tax-free.7Internal Revenue Service. Instructions for Form 8606
Skipping it is one of the most common backdoor Roth mistakes. Without Form 8606, the IRS has no record that your contribution was non-deductible. In an audit years later, or when you take distributions in retirement, the IRS may treat the entire amount as pre-tax money and tax it again. The penalty for failing to file the form when required is $50, on top of the risk of double taxation.8Office of the Law Revision Counsel. 26 USC 6693 – Failure to Provide Reports on Individual Retirement Accounts or Annuities
File Form 8606 for every year you make a non-deductible contribution and every year you convert. If you do both in the same year, which is typical for a backdoor Roth, one form covers both events. Keep copies indefinitely. Your basis in non-deductible contributions carries forward for life, and you may need to prove it decades later.