How Are Roth Conversions Taxed as Ordinary Income

A Roth conversion is taxed as ordinary income in the year you complete it. The pre-tax dollars you move from a traditional IRA, SEP IRA, SIMPLE IRA, or 401(k) into a Roth IRA get added to your wages, interest, and other earnings and taxed at your marginal federal rate, which runs from 10% to 37% in 2026 depending on total taxable income.¹ The 10% early-withdrawal penalty does not apply to the conversion itself,² but state tax, Medicare surcharges, Social Security taxation, and a five-year holding period on the converted amount can push the real cost well above the federal line-item.

How the Federal Tax Is Calculated

Federal law requires the taxable portion of a conversion to be included in your gross income for the year the money lands in the Roth.² A $60,000 conversion hits your return the way $60,000 of extra salary would. It stacks on top of everything else you earned and fills the brackets from the bottom up, so only the slice that crosses a threshold pays the higher rate.

For a single filer in 2026, the 22% bracket starts at $50,401 of taxable income, the 24% bracket at $105,701, and the 32% bracket at $201,776. For married couples filing jointly those thresholds roughly double: $100,801, $211,401, and $403,551. The 2026 standard deduction is $16,100 for single filers and $32,200 for joint filers, so a single filer with $50,000 in wages and a $40,000 conversion lands around $73,900 of taxable income, with the top slice in the 22% bracket.¹

There is no income limit for conversions, unlike Roth contributions. Anyone can convert any amount at any income level. That is the mechanism high earners use for the so-called backdoor Roth, and it also means someone with an unusually low-income year can move a large balance at a bargain rate.

The Pro-Rata Rule When You Have After-Tax Money

If every dollar in your traditional IRAs was tax-deductible when it went in, your entire conversion is taxable. The math changes when you’ve made nondeductible contributions. You cannot cherry-pick the after-tax dollars and convert just those tax-free. Federal law treats all your traditional, SEP, and SIMPLE IRAs as one pool and requires a proportional split.³

Add up the combined value of all those accounts as of December 31 of the conversion year. Divide your total nondeductible contributions (your basis) by that combined balance. The result is the fraction of any conversion that comes out tax-free. If you have $200,000 across all traditional IRAs and $40,000 of that is nondeductible basis, 20% of any conversion is tax-free. Convert $50,000 and $10,000 escapes tax; the remaining $40,000 is ordinary income.

This trips up backdoor Roth attempts. A $7,000 nondeductible contribution converted while a $93,000 pre-tax rollover IRA is sitting alongside it produces a conversion that is only 7% tax-free. The rest gets taxed. The common workaround, if your current employer plan accepts incoming rollovers, is to roll the pre-tax IRA money into the 401(k) first so only the nondeductible contribution remains in the IRA before you convert.

SIMPLE IRAs Have a Two-Year Waiting Period

Converting from a SIMPLE IRA is different in one important way. During the first two years after you begin participating in an employer’s SIMPLE IRA plan, moving the money to any account other than another SIMPLE IRA triggers a 25% additional tax rather than the usual 10%.⁴ The 10% penalty is waived for a proper Roth conversion after that two-year window closes, but converting inside the window exposes you to the steeper charge. Wait until two years have passed from your first SIMPLE IRA contribution.

The Five-Year Rule Can Bring the Penalty Back

You don’t owe the 10% early-withdrawal penalty when you convert. You can owe it if you pull the converted money out of the Roth too soon. Each conversion carries its own five-year holding period that starts January 1 of the year the conversion occurs. Withdraw converted amounts before both five years have passed and you’ve reached age 59½, and the taxable portion of that conversion is hit with the 10% penalty.²

The penalty applies only to the pre-tax piece, the portion that was included in your gross income at conversion. If $40,000 of a $50,000 conversion was taxable and you withdraw within the five-year window while under 59½, the penalty can hit up to $40,000 of that withdrawal. The $10,000 after-tax portion comes out clean.

Roth distributions follow a specific order: regular contributions first (always tax- and penalty-free), then converted amounts on a first-in, first-out basis, and finally earnings.⁵ Once you’re past 59½, the five-year conversion clock stops mattering; converted funds come out penalty-free regardless of when the conversion happened.

There Is No Undo Button

Before 2018 you could recharacterize a Roth conversion, moving the money back to a traditional IRA and erasing the tax hit if the market dropped or the bill turned out larger than expected. That option is gone. The Tax Cuts and Jobs Act permanently eliminated recharacterization of Roth conversions for conversions made in 2018 and later.⁶ Once the conversion is complete, the income is locked in for that tax year. You can still recharacterize a current-year Roth IRA contribution back to a traditional IRA, but not a conversion. Plan the number before you press the button.

State Income Tax

The federal bill is only part of what you owe. Most states with an income tax treat Roth conversion income the same as any other ordinary income. In a state with a 5% rate, a $100,000 conversion adds roughly $5,000 on top of your federal liability. Nine states have no state income tax on this income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. A handful of other states offer partial exemptions for retirement income. Check your own state’s rules before converting.

Medicare and Social Security Effects

Conversion income shows up in places other than your tax return. Medicare Part B and Part D premiums are based on modified adjusted gross income from two years earlier, so a large conversion in 2024 can raise your 2026 premiums through the Income-Related Monthly Adjustment Amount (IRMAA). The surcharge for a single filer begins once income crosses $109,000 and climbs through several tiers to a combined Part B and Part D surcharge that approaches $7,000 per person per year at the top. Joint-filer thresholds are roughly double.⁷ Spacing conversions across several years to stay under a tier line can save real money if you’re on Medicare or approaching it.

Social Security taxation works through a related figure called provisional income, roughly your adjusted gross income plus half your Social Security benefit plus tax-exempt interest. Once provisional income crosses $25,000 for singles or $32,000 for joint filers, up to 50% of benefits become taxable; above $34,000 and $44,000, up to 85%. A conversion inflates that number. Completing conversions before you start Social Security sidesteps the interaction entirely, since Roth withdrawals later on don’t feed provisional income.

Paying the Bill Without Getting Hit With an Underpayment Penalty

Conversions don’t come with automatic withholding the way a paycheck does. A direct trustee-to-trustee IRA transfer withholds nothing.⁸ You need a plan for the tax bill or you’ll face an underpayment penalty.

If you’re converting from a 401(k) and take the distribution as a check payable to you (an indirect rollover), the plan must withhold 20% for federal taxes. To convert the full amount, you’d have to replace the withheld 20% from other funds and deposit the whole original balance into the Roth within 60 days. Any shortfall becomes a taxable distribution that never made it in.⁸ A direct trustee-to-trustee transfer avoids that trap.

For most conversions, the cleanest approach is quarterly estimated tax payments using Form 1040-ES. The IRS expects estimated payments if you’ll owe at least $1,000 after withholding and credits. To avoid an underpayment penalty, your total payments for the year must equal at least the lesser of 90% of your current-year tax or 100% of your prior-year tax. If your prior-year adjusted gross income exceeded $150,000 ($75,000 if married filing separately), the prior-year threshold rises to 110%.⁹

Reporting the Conversion and the December 31 Deadline

A conversion must be completed by December 31 of the tax year you want it to count toward. IRA contributions can be made until the April filing deadline; conversions cannot. A conversion processed on January 2, 2027 counts for 2027 regardless of when you file your 2026 return.

Your IRA custodian or plan administrator sends Form 1099-R by January 31 of the following year. Box 1 shows the gross distribution, Box 2a usually shows the same amount with Box 2b (“Taxable amount not determined”) checked, and Box 7 carries distribution Code 2 if you’re under 59½ or Code 7 if you’re older.¹⁰

You calculate the actual taxable portion on Form 8606, filed with your Form 1040. Part I runs the pro-rata math using your total basis and the combined December 31 value of all traditional IRAs. Part II applies that ratio to the conversion and produces the taxable amount that flows to Form 1040, line 4b.¹¹ If you have no nondeductible basis, the full conversion is taxable and Form 8606 simply reflects that.⁶

Keep every Form 8606 you file, going back to the first year you made a nondeductible IRA contribution or completed a conversion.⁶ Those filings prove the tax-free portion of future withdrawals and document when each conversion clock started. Lose the record and you risk paying tax twice on money that already went in after-tax.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs
3
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
4
Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
5
Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements (IRAs)
6
Internal Revenue Service. Instructions for Form 8606
7
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
8
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
9
Internal Revenue Service. 2026 Form 1040-ES
10
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
11
Internal Revenue Service. Form 8606 – Nondeductible IRAs