Roth conversions are taxed as ordinary income in the year you make them. The pre-tax dollars you move from a traditional IRA, SEP IRA, SIMPLE IRA, or employer plan into a Roth account are added to your gross income and taxed at your marginal federal rate, which for 2026 runs from 10 percent to 37 percent depending on filing status and total taxable income.1Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs The IRS is collecting the tax that was deferred when the money originally went in; in exchange, qualified future withdrawals from the Roth come out tax-free.
How the Tax Is Calculated
The converted amount stacks on top of your other income for the year. It does not qualify for long-term capital gains rates, even if the underlying investments appreciated for decades. It is taxed like wages.
For 2026, the 10 percent bracket covers the first $12,400 of taxable income for a single filer ($24,800 for married filing jointly), and the 37 percent rate kicks in above $640,600 for singles and $768,700 for joint filers.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A large conversion can push dollars at the top of the stack into a higher bracket than they would otherwise face, which is why many people spread conversions across several years rather than converting a full balance at once.
And once you convert, it is done. The Tax Cuts and Jobs Act eliminated recharacterization for conversions, so you cannot reverse the transfer or the resulting tax bill. Modeling the impact before you initiate the transfer matters more than it did under the old rules.
The Pro-Rata Rule When You Have After-Tax Basis
If every dollar in your traditional IRA came from deductible contributions and earnings, the full conversion amount is taxable. The math gets more involved when you have made nondeductible contributions at some point, because you cannot cherry-pick the after-tax dollars.
The IRS treats all of your traditional, SEP, and SIMPLE IRA balances as a single pool and applies a pro-rata formula to any conversion.1Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs Say you have $90,000 of pre-tax money and $10,000 of nondeductible contributions across your IRAs. Your after-tax basis is 10 percent of the total. Convert $50,000 and only $5,000 is tax-free; the other $45,000 is taxable ordinary income, regardless of which specific account the conversion came from.
You calculate the split on IRS Form 8606, using the total fair market value of all non-Roth IRAs as of December 31 of the conversion year.3Internal Revenue Service. Instructions for Form 8606 Keep records of your nondeductible contributions. If you lose track of your basis, you can end up paying tax on money that was already taxed on the way in.
Employer Plans Sit Outside the Pro-Rata Pool
Balances in a 401(k), 403(b), or other qualified employer plan are not included in the IRA aggregation calculation. The rule applies only to IRAs.4Office of the Law Revision Counsel. 26 U.S.C. 408 – Individual Retirement Accounts That creates a planning opening: if you roll pre-tax IRA money into your current employer’s 401(k) before converting, you effectively remove those dollars from the pro-rata pool, and a later conversion of your remaining after-tax IRA basis can be largely tax-free.
Some plans also allow an in-plan Roth conversion, moving pre-tax plan money into a designated Roth account inside the same 401(k), 403(b), or governmental 457(b). The taxable portion is included in your gross income for the year, the same as an IRA conversion.5Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
The Five-Year Rules and the Early-Withdrawal Penalty
You have already paid income tax on the converted dollars. That does not mean you can pull them back out freely. Two separate five-year clocks apply, and they are commonly confused.
Each Conversion Starts Its Own Clock
Every Roth conversion starts a five-year period that begins on January 1 of the conversion year. If you withdraw converted principal within that window and you are under 59½, the IRS applies a 10 percent early-withdrawal penalty to the taxable portion of the conversion.1Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs The penalty does not apply once you reach 59½ or if you meet another exception such as disability.6Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
A Separate Clock Governs Tax-Free Earnings
A different five-year period determines whether earnings inside the Roth can come out tax-free. This one starts January 1 of the first year you made any contribution to any Roth IRA and runs only once, not per conversion. To take earnings out tax-free and penalty-free, both conditions must be met: the five years have passed, and you are at least 59½ (or qualify through disability or death).1Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs
Ordering Rules for Withdrawals
Roth distributions follow a fixed order. Direct contributions come out first, always tax and penalty-free. Converted amounts come next on a first-in, first-out basis, with the taxable portion of each conversion out before the nontaxable portion. Earnings come out last.1Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs
Side Effects Beyond the Income Tax
Conversion income raises your modified adjusted gross income (MAGI), and MAGI drives several other calculations.
Medicare Premium Surcharges
Medicare’s Income-Related Monthly Adjustment Amount uses your tax return from two years earlier. A 2026 conversion shows up on your 2026 return, which Medicare uses to set your 2028 premiums. For 2026 premiums (based on 2024 income), singles with MAGI above $109,000 and joint filers above $218,000 pay higher Part B premiums, reaching as much as $689.90 per month at the top tier.7Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles Part D has a parallel surcharge. A one-year conversion spike can push you into a higher IRMAA bracket even if your income drops back down the following year.
Social Security Benefits
If you collect Social Security, conversion income feeds into the “combined income” formula that determines how much of your benefit is taxable. Under 26 U.S.C. § 86, single filers with combined income between $25,000 and $34,000 can owe tax on up to 50 percent of their benefits, and above $34,000 on up to 85 percent. Joint-filer thresholds are $32,000 and $44,000.8Office of the Law Revision Counsel. 26 U.S.C. 86 – Social Security and Tier 1 Railroad Retirement Benefits These thresholds are not indexed for inflation, so even a modest conversion can move a retiree past them.
Net Investment Income Tax
The conversion itself is not net investment income, so the 3.8 percent surtax does not apply to the converted amount directly.9Internal Revenue Service. Questions and Answers on the Net Investment Income Tax But because it raises MAGI, it can push you above the $200,000 (single) or $250,000 (joint) threshold and trigger the surtax on other investment income you have that year from dividends, capital gains, or rental property.
Paying the Tax Without a Penalty
A large conversion generates a tax bill that your paycheck withholding will not cover. Without adjusting withholding or making estimated payments, you can owe an underpayment penalty at filing.
For 2026, your combined withholding and estimated payments need to hit at least the smaller of 90 percent of your 2026 tax or 100 percent of your 2025 tax. If your 2025 adjusted gross income was over $150,000 ($75,000 if married filing separately), the prior-year safe harbor rises to 110 percent of your 2025 tax.10Internal Revenue Service. Form 1040-ES – Estimated Tax for Individuals
If you convert late in the year, the annualized income installment method on Schedule AI of Form 2210 can help. It recalculates each quarterly installment based on the income you actually received in that period, so earlier quarters are measured against your lower pre-conversion income.11Internal Revenue Service. Instructions for Form 2210 You still owe the full tax by the filing deadline; this method just prevents penalties on the earlier quarters.
Reporting a Conversion on Your Return
Three forms document the conversion.
Form 1099-R. Your traditional IRA custodian issues this by the end of January. Box 1 shows the gross distribution, box 2a shows the amount converted, and box 2b’s “Taxable amount not determined” box is typically checked because the custodian does not know your basis. Box 7 carries distribution code 2 if you are under 59½ or code 7 if you are older.12Internal Revenue Service. Instructions for Forms 1099-R and 5498
Form 8606. You file this with your Form 1040. Part I calculates your basis ratio using year-end total value across all traditional, SEP, and SIMPLE IRAs and your cumulative nondeductible contributions. Part II applies that ratio to the converted amount, and the taxable figure flows to line 4b of the 1040.3Internal Revenue Service. Instructions for Form 8606 Even if your entire conversion is taxable because you have zero basis, you still file Form 8606 to report the conversion in Part II.
Form 5498. The receiving Roth custodian files this with the IRS by June 1 of the following year. Box 3 shows the conversion amount.12Internal Revenue Service. Instructions for Forms 1099-R and 5498 You do not file it yourself, but you should reconcile the copy you receive against your Form 8606. Because it arrives after the April deadline, most people file the return first from their own records and then check the 5498 when it comes.
State Income Tax
Federal tax is only part of the bill. Most states with an income tax treat conversion income as ordinary income, with rates ranging from roughly 2 percent to over 13 percent at the top. A handful of states impose no personal income tax, leaving residents with only the federal liability. Some states offer partial exemptions or deductions for retirement income tied to age or income level, which can reduce the state tax on a conversion. The rules vary enough that checking your own state’s treatment before you convert is worth doing.