Yes. A Roth conversion counts as taxable income to the extent you are moving money that has never been taxed. When you shift funds from a Traditional, SEP, or SIMPLE IRA into a Roth IRA, any pre-tax contributions and all investment growth get added to your ordinary income for the year the conversion is completed. Only the portion that represents nondeductible contributions you already paid tax on, your “basis,” passes into the Roth tax-free.
What Part of the Conversion Is Taxable
The rule is simple in principle: money that has already been taxed is not taxed again, and money that has never been taxed is taxed when it enters a Roth IRA. That splits every conversion into two buckets.
Pre-tax money includes any contributions you deducted on past returns plus every dollar of investment growth, whether from dividends, interest, or appreciation. All of it becomes ordinary income on the conversion.1Internal Revenue Service. Topic No. 309, Roth IRA Contributions
After-tax money is your basis, the nondeductible contributions you made in years when you could not deduct them. If you convert $50,000 and $10,000 of that is documented nondeductible basis, only $40,000 is added to your taxable income.
Growth is always pre-tax, even if it grew on top of a nondeductible contribution. That is why conversions are often sized to years when a balance is temporarily low; less growth in the account means less taxable income on the conversion.
You Have to Prove the Basis
The IRS does not know which of your IRA dollars were already taxed unless you tell them, and the only way to tell them is Form 8606. If you have ever made a nondeductible contribution, you are required to file Form 8606 with your return for every year you contribute or convert.2Internal Revenue Service. About Form 8606, Nondeductible IRAs Without that running record, the IRS treats the entire conversion as pre-tax and taxes every dollar, which effectively taxes your basis a second time.
The direct penalty for failing to file when required is $50 per occurrence.3Internal Revenue Service. Instructions for Form 8606 The larger cost is losing the paper trail. Keep copies of every Form 8606, every Form 5498 showing contribution information, and every 1099-R until all IRA distributions are complete.
The Pro-Rata Rule If You Have Mixed IRA Money
You cannot convert just the basis and leave the pre-tax money behind. If your Traditional IRA holds both pre-tax and after-tax dollars, the IRS treats every dollar you convert as a proportional mix of the two. This catches people off guard, especially those attempting a backdoor Roth who did not realize the rule exists.
The calculation aggregates all of your Traditional, SEP, and SIMPLE IRA balances as if they were one account. Balances in 401(k)s and other employer plans are not included.3Internal Revenue Service. Instructions for Form 8606 The formula:
(Total nondeductible basis across all non-Roth IRAs) ÷ (Total fair market value of all non-Roth IRAs on December 31 of the conversion year) = Non-taxable percentage
Multiply that percentage by the amount you converted. The result is the tax-free portion; the rest is ordinary income. Example: you have $100,000 across all non-Roth IRAs, and $20,000 of that is documented basis. Your basis percentage is 20%. Convert $30,000, and $6,000 is tax-free while $24,000 is taxable.
Two details trip people up. First, the December 31 balance governs the ratio, not the balance on the day you converted. A rollover or contribution later in the year will change the math retroactively. Second, every non-Roth IRA you own is in the pool, including accounts at other custodians that you had no intention of touching.
Clearing Pre-Tax Money Out of the IRA
If your goal is to convert only after-tax basis, pre-tax balances in any Traditional, SEP, or SIMPLE IRA will dilute the result through the pro-rata rule. The common workaround is to roll the pre-tax IRA money into your current employer’s 401(k) before December 31, if the plan accepts incoming rollovers. Once those dollars are out of the IRA system, the remaining IRA balance is all basis, and the conversion generates little or no tax.
Reporting the Conversion on Your Return
Three forms do the work: the 1099-R from your custodian, Form 8606, and your Form 1040.
Your IRA custodian will send Form 1099-R showing the gross amount of the conversion in Box 1. Box 2a may show the same amount or may be blank with the “Taxable amount not determined” box checked, because the custodian has no idea what your basis is.4Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
The gross amount from Box 1 goes on the IRA distributions line of your Form 1040. You then complete Form 8606: Part I establishes your cumulative basis, and Part II calculates the taxable portion using the pro-rata formula.3Internal Revenue Service. Instructions for Form 8606 The taxable figure from Form 8606 goes on the taxable amount line of Form 1040, and the completed 8606 is attached to the return.5Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Skip it and the IRS will assume the entire gross distribution is taxable and send you a notice for the difference.
Paying the Tax Without an Underpayment Penalty
Federal income tax is pay-as-you-go. A sizable conversion can create a tax bill your normal withholding never anticipated, which exposes you to an underpayment penalty when you file. Two safe harbors protect you. You avoid the penalty if you pay at least 90% of the current year’s total tax through withholding and estimated payments, or at least 100% of the tax shown on last year’s return (110% if your prior-year AGI exceeded $150,000, or $75,000 if married filing separately).6Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax For a first-time large conversion, the prior-year safe harbor is usually the easier target because last year’s tax was lower.
Timing matters. A conversion done in October or November comes after three of the four quarterly estimated-payment deadlines (April 15, June 15, September 15, and January 15 of the following year). Two moves help:
- Increase W-2 or pension withholding before year-end. Federal tax withheld from wages or pension payments is treated as paid evenly across the year even if you boost the amount in December, so a late-year withholding adjustment can cover the conversion without triggering quarterly underpayment.
- Use the annualized income installment method. If the conversion income landed in a specific quarter, file Form 2210 with Schedule AI to show when the income actually hit, which reduces or eliminates the penalty for earlier quarters when the conversion had not yet occurred.7Internal Revenue Service. Form 2210 – Underpayment of Estimated Tax by Individuals, Estates, and Trusts
How the Added Income Ripples Through the Rest of Your Return
The taxable portion of a conversion increases your adjusted gross income, and a higher AGI can trigger costs beyond the income tax rate on the conversion itself. People who look only at their marginal bracket often miss these.
Medicare Premium Surcharges
Medicare bases Part B and Part D premiums on your modified adjusted gross income from two years earlier. A conversion done in 2024 can raise your 2026 premiums. The income-related monthly adjustment amount (IRMAA) is structured as tiers with hard cutoffs; for 2026 premiums, the first tier begins at $109,000 for single filers and $218,000 for joint filers.8Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles Crossing a threshold by a single dollar triggers the full surcharge for that whole bracket, and for a couple on Medicare the amount applies to each spouse. Sizing a conversion to land just under a threshold is often worth more than the next slice of converted money is worth.
Social Security Benefit Taxation
If you collect Social Security, conversion income can make a larger share of your benefits taxable. The IRS calculates “provisional income” as half your Social Security benefit plus your AGI plus any tax-exempt interest. For single filers, benefits begin to be partially taxable at $25,000 of provisional income and up to 85% taxable above $34,000; for joint filers, the thresholds are $32,000 and $44,000.9Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable A conversion can push someone from 50% taxable to 85% taxable, which is a cost that does not show up when you look at the conversion in isolation.
Net Investment Income Tax
The 3.8% Net Investment Income Tax applies to the lesser of your net investment income or the amount your MAGI exceeds $200,000 (single) or $250,000 (joint).10Internal Revenue Service. Topic No. 559, Net Investment Income Tax Conversion income is not itself net investment income, so the 3.8% does not apply to the converted amount. It does raise your MAGI, which can pull other investment income (capital gains, dividends, rents) over the threshold and subject that income to the surtax.
Credits, Deductions, and Brackets
Many tax benefits phase out as AGI climbs. Conversion income can shrink or eliminate the Child Tax Credit and the American Opportunity Tax Credit, and it raises the floor for medical expenses, which are deductible only above 7.5% of AGI.11Internal Revenue Service. Topic No. 502, Medical and Dental Expenses The conversion can also push ordinary income into a higher marginal bracket, raising the rate on dollars that would otherwise have been taxed at a lower one.
None of this makes conversions a bad idea. It is the reason people who convert in smaller slices across multiple lower-income years usually come out ahead of people who convert a whole balance in a single year.
One Boundary: Paying Tax Now Doesn’t Open the Account
Owing income tax on a conversion does not give you immediate penalty-free access to the converted dollars. Each conversion carries its own five-year clock. If you withdraw converted amounts before five years have passed and you are under 59½, the IRS applies a 10% early withdrawal penalty on the portion you take out.12Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The clock starts January 1 of the conversion year regardless of the actual conversion date, and each year’s conversion has its own independent five-year window. The penalty does not apply if you are 59½ or older, disabled, or if the distribution is paid to a beneficiary after your death.