What Is an IRA Conversion: Tax Rules, Pro-Rata, and Five-Year Clocks

An IRA conversion moves money from a Traditional, SEP, or SIMPLE IRA into a Roth IRA. You pay ordinary income tax on the converted amount for the year of the conversion, and in return the money grows tax-free and comes out tax-free in retirement if you follow the rules. There is no dollar cap on how much you can convert, and since 2010 there has been no income limit on who can do it.1Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs

A Conversion Is Not a Contribution

Regular Roth contributions are capped and phase out at higher incomes. For 2026, IRA contributions are limited to $7,500, or $8,600 if you are 50 or older.2Internal Revenue Service. Retirement Topics – IRA Contribution Limits Conversions ignore both restrictions. You can convert $10,000, $500,000, or your entire balance in a single year regardless of what you earn, and you can convert as many times in a year as you want.3Internal Revenue Service. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs)

Congress eliminated the old $100,000 modified AGI cap on conversions through the Tax Increase Prevention and Reconciliation Act of 2005, effective in 2010. That change opened the door to what is commonly called the backdoor Roth: a high earner who cannot contribute directly to a Roth makes a nondeductible contribution to a Traditional IRA and then converts it. The IRS has not formally challenged the strategy, but it has also never issued definitive guidance blessing it, so a sliver of uncertainty remains for people who use it purely to sidestep the Roth contribution income limits.

How the Tax Bill Works

The taxable portion of a conversion is added to your ordinary income for the year. Convert $50,000 from a Traditional IRA where every contribution was deductible, and that full $50,000 lands on top of your wages on your return.4Internal Revenue Service. Retirement Plans FAQs Regarding IRAs – Section: Rollovers and Roth Conversions The conversion itself is exempt from the 10% early-distribution penalty even if you are under 59½.1Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs

A large conversion can push part of your income into a higher federal bracket than your wages alone reach, and most states with an income tax treat conversion income as taxable too.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The common planning response is to spread a large balance across several partial conversions in different years, converting just enough each year to fill your current bracket without spilling into the next.

The Pro-Rata Rule If You Have Mixed IRA Money

If every dollar in your Traditional IRA came from deductible contributions, the whole conversion is taxable and the math is simple. If you hold a mix of pre-tax and after-tax dollars, the IRS will not let you convert only the after-tax portion. It treats all of your Traditional, SEP, and SIMPLE IRAs as one combined pool and calculates the taxable percentage from the ratio of after-tax basis to total balance.

On Form 8606, you divide your total nondeductible basis by the combined year-end value of all your Traditional, SEP, and SIMPLE IRAs plus any distributions and conversions taken during the year. That ratio, multiplied by the conversion amount, is the tax-free portion. The rest is taxable.6Internal Revenue Service. 2025 Form 8606

Say you have $95,000 in pre-tax money across your IRAs and $5,000 in nondeductible contributions, for a total of $100,000. Your after-tax ratio is 5%. Convert $20,000, and only $1,000 comes across tax-free; the other $19,000 is added to your income. People trying the backdoor Roth with sizable existing pre-tax balances often find the pro-rata rule makes the conversion far more expensive than they expected. A common workaround is rolling the pre-tax money into an employer 401(k) first, if the plan accepts incoming rollovers, to shrink the pre-tax pool before converting.

Paying the Tax

A conversion does not come with automatic withholding the way a paycheck does. A trustee-to-trustee transfer moves the funds with no tax withheld, so you can end up owing a large sum at filing time. The IRS charges an underpayment penalty if you fall short during the year. You generally avoid it if you owe less than $1,000 after withholding and credits, or if you paid at least 90% of your current-year tax or 100% of last year’s tax, whichever is smaller.7Internal Revenue Service. Estimated Taxes

For a large conversion, the safest move is a quarterly estimated payment or a bump in W-2 withholding for the rest of the year. Paying the tax out of the converted funds themselves is legal but counterproductive: every dollar diverted to taxes is a dollar that will never grow tax-free in the Roth.

The Two Five-Year Rules

Roth IRAs run on two separate five-year clocks, and confusing them is one of the most common post-conversion mistakes.

The first clock applies to converted principal. Each conversion starts its own five-year period, beginning January 1 of the tax year of the conversion. Withdraw converted amounts before that window closes while you are under 59½, and you owe a 10% additional tax on the portion that was taxable at conversion.8Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs) – Section: Additional Tax on Early Distributions Once you turn 59½, this penalty disappears regardless of how recent the conversion was.

The second clock applies to earnings. For any Roth withdrawal to be fully tax-free and penalty-free as a qualified distribution, you must have held any Roth IRA for at least five tax years and meet one of these conditions:

Roth withdrawals follow a set ordering rule: contributions come out first (always tax- and penalty-free), then conversion amounts (oldest first), and then earnings. That order means you can usually reach your original contributions without triggering either five-year rule, but tapping conversion dollars or earnings early gets expensive.

Conversions Are Permanent

Before 2018 you could undo a conversion through recharacterization, moving the money back to a Traditional IRA and erasing the tax hit. The Tax Cuts and Jobs Act eliminated that option for conversions starting in 2018. A conversion to a Roth IRA is now irreversible. Once you convert, you owe the tax. There is no undo button if the market drops or you decide you converted more than you can comfortably pay tax on, which makes running the numbers before you pull the trigger more important than it used to be.

Situations That Change the Rules

SIMPLE IRA Two-Year Wait

You cannot convert money from a SIMPLE IRA until you have participated in the SIMPLE plan for at least two years. Convert before the two-year mark and the distribution carries a 25% additional tax rather than the usual 10%, on top of the ordinary income tax.10Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Verify your enrollment date before starting a SIMPLE conversion.

Take Your RMD First

If you are old enough to owe required minimum distributions from a Traditional IRA, you must take the full RMD for the year before converting any additional funds. The RMD itself cannot be rolled into a Roth.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Both the RMD and the conversion count as taxable income for the year, so the combined bill can be steep.

Side Effects Beyond Your Tax Bracket

Conversion income does not stop at your federal bracket. It ripples into other calculations that use modified AGI, and this is where people are most often caught off guard.

Medicare IRMAA

Medicare Part B and Part D premiums are based on modified AGI from two years earlier. A large conversion in 2026 affects premiums in 2028. Once a single filer’s MAGI exceeds $109,000 (or $218,000 for joint filers), an income-related monthly adjustment amount is added to the standard $202.90 Part B premium, with the surcharge rising through several tiers.12CMS. 2026 Medicare Parts A and B Premiums and Deductibles A single conversion can push you into a higher IRMAA tier for one year, costing thousands. Anyone near or on Medicare should model the IRMAA hit before deciding how much to convert.

Social Security Benefits

Whether your Social Security benefits are taxable depends on combined income: half your Social Security plus other taxable income plus tax-exempt interest. For single filers, benefits start becoming partly taxable at $25,000 of combined income and up to 85% taxable at $34,000; for joint filers, the thresholds are $32,000 and $44,000.13Office of the Law Revision Counsel. 26 U.S. Code 86 – Social Security and Tier 1 Railroad Retirement Benefits A conversion that adds tens of thousands to your income can push combined income past the 85% threshold and make nearly all of your Social Security benefits taxable for that year.

Net Investment Income Tax

The 3.8% net investment income tax applies when MAGI exceeds $200,000 (single) or $250,000 (joint).14Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax Conversion income is not itself investment income, but it does raise your MAGI. If you already have capital gains, dividends, or interest income, a large conversion can push your total MAGI past the threshold and trigger the 3.8% surtax on that investment income.

How to Actually Move the Money

The IRS recognizes three ways to execute a conversion.4Internal Revenue Service. Retirement Plans FAQs Regarding IRAs – Section: Rollovers and Roth Conversions

  • Trustee-to-trustee transfer. The institution holding your Traditional IRA sends the funds directly to the institution holding your Roth. You never touch the money, which makes this the cleanest option.
  • Same-trustee transfer. If both accounts sit at the same firm, it moves the assets between account types internally. Functionally the same as trustee-to-trustee, just faster.
  • 60-day rollover. You take a distribution, receive the funds personally, and deposit them into a Roth within 60 calendar days. Miss the deadline and the entire amount becomes a taxable distribution, plus the 10% early-withdrawal penalty if you are under 59½.15Internal Revenue Service. Retirement Plans FAQs Relating to Waivers of the 60-Day Rollover Requirement

One detail worth knowing about the 60-day path: IRA distributions carry only 10% voluntary withholding (which you can opt out of), not the 20% mandatory withholding that applies to distributions from 401(k)s and other employer plans.16Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions If any tax is withheld and you want the full original amount to land in the Roth, you have to make up the shortfall from other funds; anything left behind is treated as a taxable distribution.

You do not have to convert your whole balance at once. The IRS allows you to convert all or any portion of a distribution, and conversions are exempt from the one-per-year rollover rule that limits IRA-to-IRA rollovers to one in any 12-month period.16Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Convert as many times a year as you like.

Forms and Records

Every conversion generates paperwork on both ends. The institution holding your Traditional IRA issues a Form 1099-R for the distribution.17Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The institution receiving the funds into your Roth files Form 5498, reporting the conversion amount in Box 3.18Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025) – Section: Roth IRA Conversions

On your return, the conversion goes on Form 8606, which tracks your basis and calculates the taxable and nontaxable portions. This form is required for any year you make a nondeductible contribution, take a distribution from a Traditional IRA that has after-tax basis, or convert to a Roth.19Internal Revenue Service. About Form 8606, Nondeductible IRAs Skipping a required 8606 for a nondeductible contribution can bring a $50 penalty.20Internal Revenue Service. Instructions for Form 8606 (2025)

The IRS generally wants you to keep tax records for three years from the date you file.21Internal Revenue Service. How Long Should I Keep Records Form 8606 is the exception. Keep every copy for as long as you hold any IRA or Roth IRA. Your basis carries forward indefinitely, and if the IRS ever questions the tax-free portion of a future Roth distribution, those old 8606 forms are your proof that you already paid tax on the money.