A Roth IRA conversion moves money from a pre-tax retirement account, such as a traditional IRA or 401(k), into a Roth IRA. You pay ordinary income tax on the converted amount in the year of the conversion, and in exchange the money grows tax-free and qualified withdrawals later are tax-free. There is no dollar cap on how much you can convert and no income limit that blocks you from doing it. The tradeoff is a tax bill now against tax-free treatment for the rest of that money’s life.
How the Mechanics Work
Funds leave a pre-tax account and land in a post-tax Roth IRA. Eligible source accounts include traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans like 401(k)s. Once the money reaches the Roth IRA, it follows Roth rules: tax-free growth, no required minimum distributions during your lifetime, and tax-free qualified withdrawals later.1Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
A conversion is not a contribution. Annual IRA contribution limits for 2026 are $7,500, or $8,600 if you are 50 or older, but those caps do not apply to conversions.2Internal Revenue Service. Retirement Topics – IRA Contribution Limits You could convert $10,000 or $1,000,000 in the same year. The only practical constraint is the tax bill.
You can convert by liquidating holdings and transferring cash, or you can move assets in-kind, meaning the actual shares transfer without being sold. An in-kind transfer keeps you invested through the process, which matters if you do not want to be out of the market while the conversion settles.
If the money is currently in a 401(k) at your current employer, you generally need a “distributable event” such as reaching age 59½ or qualifying for an in-service withdrawal under the plan’s terms. Not every plan allows in-service distributions, so check with your plan administrator. Once you have separated from an employer, you can roll those funds into a traditional IRA and then convert, or roll directly into a Roth IRA if the plan permits it.
Income Limits and the Backdoor Roth
Anyone with money in an eligible pre-tax retirement account can convert, regardless of income. The income limits that exist for Roth IRAs apply only to direct contributions. For 2026, single filers with modified adjusted gross income above $168,000 and joint filers above $252,000 cannot contribute directly to a Roth IRA. Those thresholds have no bearing on conversions.3Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
High earners who cannot contribute directly often use a two-step workaround called a backdoor Roth. First, you make a nondeductible contribution to a traditional IRA (traditional IRAs have no income limit for contributions, just for deducting them). Then you convert that traditional IRA to a Roth. Since you already paid tax on the contribution, the conversion itself generates little or no additional tax, as long as you have no other pre-tax IRA money. If you do hold pre-tax IRA balances elsewhere, the pro-rata rule described below will apply.
How the Tax Is Calculated
The IRS treats the taxable portion of your conversion as ordinary income in the year the conversion occurs. If you convert $50,000 of pre-tax money, that $50,000 is added to your wages, business income, and everything else on your return. There is no capital gains treatment.
Conversion income is not subject to the 3.8% net investment income tax. The IRS explicitly excludes distributions from plans described in sections 408 and 408A of the tax code from net investment income.4Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
The Pro-Rata Rule
If you have both pre-tax and after-tax (nondeductible) money spread across your traditional IRAs, you cannot pick out only the after-tax portion to convert. The IRS treats all of your traditional, SEP, and SIMPLE IRAs as a single pool and applies a proportional calculation.
Suppose you have $90,000 in pre-tax traditional IRA money and $10,000 in nondeductible contributions across all your IRAs, for a total of $100,000. Your after-tax basis is 10% of the total. If you convert $20,000, only 10% of that ($2,000) is tax-free. The remaining $18,000 is taxable. You report this calculation on Part I of IRS Form 8606 using the total fair market value of all your traditional IRAs as of December 31 of the conversion year.5Internal Revenue Service. 2025 Instructions for Form 8606 – Nondeductible IRAs
This is where the backdoor Roth falls apart for people who already have large pre-tax IRA balances. If you make a $7,500 nondeductible contribution and immediately convert it while also holding $200,000 in a rollover IRA, the vast majority of your conversion will still be taxable. One workaround is to roll pre-tax IRA money into a current employer’s 401(k) before executing the backdoor conversion, which removes that balance from the pro-rata calculation.
Do Not Withhold From the Conversion
If you ask your custodian to withhold taxes from the conversion amount before sending it to your Roth IRA, the withheld money never reaches the Roth. The IRS views that withheld portion as a distribution rather than a conversion. If you are under 59½, the withheld amount can trigger the 10% early distribution penalty on top of ordinary income tax.6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Convert the full amount and pay the tax bill from a separate checking or savings account.
The Two Five-Year Rules
Roth IRAs have two separate five-year rules. Confusing them is one of the most common mistakes after a conversion.
The Conversion Five-Year Rule
Each conversion carries its own five-year holding period. The clock starts on January 1 of the year you convert, regardless of when during the year the conversion happened. If you are under 59½ and withdraw converted amounts before that five-year window closes, you owe a 10% penalty on the taxable portion. Once you reach 59½, the penalty disappears regardless of how long ago the conversion took place.7Internal Revenue Service. 2025 Publication 590-B – Distributions From Individual Retirement Arrangements
If you convert in multiple years, each year’s conversion has its own clock. A 2026 conversion runs through the end of 2030. A 2027 conversion runs through the end of 2031. This matters most for people converting well before they turn 59½.
The Earnings Five-Year Rule
A separate five-year clock governs whether earnings in the Roth IRA come out tax-free. This clock starts on January 1 of the first year you contributed to or converted into any Roth IRA. You only have one of these clocks, and it does not reset with each conversion. To withdraw earnings tax-free as a “qualified distribution,” you must satisfy this five-year period and be at least 59½, disabled, or using up to $10,000 for a first home purchase.
Distribution Ordering
When you take money out of a Roth IRA, the IRS applies a specific order:7Internal Revenue Service. 2025 Publication 590-B – Distributions From Individual Retirement Arrangements
- Regular contributions come out first, always tax-free and penalty-free because you already paid tax on them.
- Conversions come out next on a first-in, first-out basis. Within each conversion, the taxable portion comes out before the nontaxable portion. If the conversion’s five-year period has not passed and you are under 59½, the taxable portion triggers the 10% penalty.
- Earnings come out last and are only tax-free and penalty-free if the withdrawal is a qualified distribution.
Someone who has been making regular Roth contributions for years can withdraw up to the total of those contributions before touching any converted money. That buffer can matter if you need cash before a conversion’s five-year window closes.
A Conversion Cannot Be Undone
Before 2018, you could reverse a Roth conversion through a process called recharacterization, moving the money back to a traditional IRA and erasing the tax bill. The Tax Cuts and Jobs Act eliminated that option. Any Roth conversion made on or after January 1, 2018, cannot be reversed.8Internal Revenue Service. Retirement Plans FAQs Regarding IRAs
If the market drops 30% the month after you convert, you still owe taxes on the pre-drop value. The tax bill is final.
When a Conversion Makes Sense
The math comes down to a bet: will you pay less tax on this money now than you would later? Several factors push the answer one way or the other.
Tax Brackets
For 2026, federal income tax rates range from 10% to 37%.9Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The most effective conversions happen in years when your taxable income is unusually low: early retirement before Social Security starts, a year between jobs, or a year with large deductions. Converting just enough to fill up your current bracket without spilling into the next is a common approach. Because you can convert any amount, partial conversions spread over several years often beat one large conversion that pushes you into a much higher bracket.
Medicare Premiums
Medicare Part B and Part D premiums include income-related surcharges called IRMAA, based on your modified adjusted gross income from two years earlier. A large Roth conversion in 2026 can spike your income and raise Medicare premiums in 2028. Spreading conversions over several years helps avoid a single jump into a high IRMAA bracket. Once the money is in the Roth, qualified withdrawals in retirement do not count toward IRMAA at all.
Social Security
Up to 85% of your Social Security benefits can be subject to federal income tax depending on your “combined income” (adjusted gross income plus nontaxable interest plus half of your Social Security benefits). The thresholds are $34,000 for single filers and $44,000 for joint filers. Conversion income counts toward this calculation and can push more of your benefits into taxable territory. Roth withdrawals in later years do not factor into the formula. Converting before you claim Social Security, or in years when your benefits are modest, can reduce the long-term tax drag on those benefits.
How to Execute the Transfer
The money can move in one of three ways:
- Trustee-to-trustee transfer. The sending institution wires or mails the funds directly to the receiving custodian. You never touch the money. This is the cleanest option and avoids withholding complications.
- Same-institution transfer. If both your traditional and Roth accounts are at the same custodian, the firm reclassifies the assets internally. This is typically fastest and can often be done online.
- Indirect rollover. The custodian sends the funds to you, and you have 60 calendar days to deposit them into the Roth IRA. Miss the deadline and the entire amount becomes a taxable distribution, potentially with a 10% penalty if you are under 59½. If your plan withholds 20% for taxes on the indirect rollover, you must come up with that 20% from other funds to deposit the full amount; otherwise the shortfall is treated as a distribution.10Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Most custodians process conversions through their online portals with a signed digital authorization. You will need account numbers for both the sending and receiving accounts. For an in-kind transfer, you specify which holdings to move rather than liquidating first. After the transfer completes, confirm the transaction in your account history and save the confirmation with its timestamp and transaction ID.
Tax Forms You Will See
You file Form 8606 with your tax return for the conversion year. Part I tracks your basis across all traditional IRAs and calculates the taxable portion using the pro-rata rule. Part II reports the net amount converted to a Roth IRA.11Internal Revenue Service. About Form 8606, Nondeductible IRAs Line 6 requires the total value of all your traditional, SEP, and SIMPLE IRAs as of December 31 of the conversion year.5Internal Revenue Service. 2025 Instructions for Form 8606 – Nondeductible IRAs
The sending institution generates Form 1099-R to report the distribution. It shows the gross distribution and uses a distribution code (typically 2 or 7, depending on your age) to identify the transaction as a Roth conversion.12Internal Revenue Service. Instructions for Forms 1099-R and 5498 You will receive it by early February of the following year.
The receiving custodian issues Form 5498, with Box 3 showing the conversion amount.13Internal Revenue Service. Form 5498 IRA Contribution Information Keep both Form 1099-R and Form 5498 in your records. They are your proof of when each conversion occurred, which is what tracks the five-year clocks.
What Your Heirs Inherit
Beneficiaries who inherit a Roth IRA receive distributions tax-free as long as the original owner’s five-year clock for earnings has been satisfied. The clock does not reset at death; beneficiaries get credit for the years the owner already held the Roth.
Under the SECURE Act of 2019, most non-spouse beneficiaries must empty an inherited Roth IRA within 10 years of the owner’s death. Exceptions apply for surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries who are no more than 10 years younger than the deceased. A surviving spouse can treat the inherited Roth as their own, which eliminates the 10-year deadline entirely.
Even with the 10-year drawdown, an inherited Roth IRA is more flexible than an inherited traditional IRA because the distributions are tax-free once the earnings clock is met. The beneficiary can take the money out in any pattern over those 10 years without generating a tax bill, giving them control over their own income and tax bracket.