The Roth Conversion Rundown

What Is a Roth Conversion?

A Roth conversion moves money from a pre-tax retirement account (traditional IRA, SEP IRA, SIMPLE IRA, or 401(k)) into a Roth IRA. You pay income tax on the converted amount in the year of the conversion. After that, the money grows tax-free and qualified withdrawals are tax-free.

The conversion itself is straightforward. The consequences are where people get surprised. The tax bill, the Medicare impact, the pro-rata rule, and the irreversibility of the decision all need to be understood before you convert, not after.

A Roth conversion is a one-way door. You walk through it on purpose, not by accident.

How the Tax Hit Works

The amount you convert is added to your ordinary income for the year. If you convert $100,000, your taxable income goes up by $100,000. The tax is calculated at your marginal rate.

If you were in the 22% bracket before the conversion and the conversion pushes you into the 24% bracket, you pay 22% on the portion that fills the 22% bracket and 24% on the rest. The conversion does not have its own tax rate. It stacks on top of everything else: your wages, your Social Security, your pension, your investment income.

That stacking effect is what makes conversion sizing critical. Converting too much in a single year can push you into a bracket that wipes out the long-term benefit. Converting the right amount, filling one bracket without spilling into the next, is how the math works in your favor.

Your custodian will not withhold taxes automatically on a Roth conversion from an IRA (though they will offer to). Most tax professionals recommend paying the tax bill from outside funds, not from the converted amount itself.

If you convert $100,000 and withhold $24,000 for taxes, only $76,000 lands in your Roth. The $24,000 that went to the IRS is no longer growing tax-free. Paying the tax from a separate checking or brokerage account keeps the full $100,000 working inside the Roth.

The conversion itself is reported to the IRS on Form 1099-R from the distributing custodian.

The Pro-Rata Trap

If you have any pre-tax money in any traditional, SEP, or SIMPLE IRA, the pro-rata rule applies to your conversion. You cannot cherry-pick which dollars get converted.

The IRS looks at the total value of all your traditional IRAs as of December 31 of the conversion year and calculates what percentage is pre-tax versus after-tax (basis). That percentage applies to your conversion.

If you have $50,000 in non-deductible (basis) contributions and $450,000 in pre-tax money across all your IRAs, your total is $500,000 and your basis is 10%. If you convert $50,000 hoping to convert only the basis, the IRS says 10% ($5,000) is tax-free and 90% ($45,000) is taxable.

The pro-rata rule uses the aggregate value across every traditional, SEP, and SIMPLE IRA you own. The only way around it is to roll the pre-tax money into an employer plan (like a 401(k)) before converting, which removes those dollars from the pro-rata calculation.

This is why the backdoor Roth strategy fails for people with existing rollover IRAs. The workaround exists, but you have to know about it before you convert. The math itself gets reported on Form 8606, which tracks your basis across years.

IRMAA and Medicare Surcharges

This is the cost most people never see coming.

Medicare Part B and Part D premiums are based on your Modified Adjusted Gross Income from two years prior. This is called IRMAA (Income-Related Monthly Adjustment Amount). A large Roth conversion in one year can push your income above an IRMAA threshold, and the Medicare surcharge hits two years later when you enroll in or are already on Medicare.

The surcharges are significant. The highest IRMAA tier adds nearly $500 per month to Part B and over $80 per month to Part D, per person. For a married couple, that can exceed $14,000 per year in additional Medicare premiums triggered by a single conversion.

The surcharge applies for the entire year based on one year of income. If your conversion pushes you $1 over a threshold, you pay the full surcharge for 12 months. There is no partial tier.

The conversion tax is one cost. The IRMAA surcharge is a second cost that most conversion analyses ignore entirely. Both need to be modeled before you convert.

Conversion Timing Strategies

The goal of a conversion strategy is to fill low-tax years with conversion income before RMDs begin.

The best conversion window for most people is the gap between retirement and age 73, when income drops but RMDs have not started yet. During those years, taxable income may be low enough to convert at the 12% or 22% bracket, which is lower than the bracket RMDs will push you into later.

Converting the right amount each year to fill a bracket without spilling over is called "bracket filling." It requires knowing your other income sources (Social Security start date, pension, investment income) and projecting forward.

Converting too much defeats the purpose. Converting too little leaves money in the pre-tax account that will be forced out as RMDs at potentially higher rates.

The math is different for every person. There is no universal "best amount" to convert. It depends on your current bracket, your projected bracket in retirement, your other income, your Medicare timing, and your estate planning goals.

The 5-Year Rule for Conversions

Each Roth conversion has its own 5-year clock.

If you withdraw the converted amount before five years have passed and you are under age 59½, the withdrawal is not subject to income tax (you already paid that at conversion), but it may be subject to the 10% early withdrawal penalty. The penalty applies to the converted amount, not just the earnings.

Once you turn 59½, the 5-year rule for conversions no longer matters because all Roth distributions of contributions and conversions are penalty-free after that age. Earnings still have their own 5-year rule tied to when you first opened any Roth IRA.

The 5-year clock for each conversion starts on January 1 of the year you made the conversion, regardless of what month the actual conversion occurred. A conversion in December of one year has the same 5-year start date as a conversion in January of that year.

Roth Conversions in Retirement

You can convert at any age. There is no age limit.

If you are 75 and taking RMDs, you can still convert additional amounts above your RMD. You cannot convert the RMD itself. The RMD must be distributed first, then any additional amount can be converted.

For people already on Medicare, the IRMAA impact is immediate. The conversion income shows up on your tax return, and two years later, Medicare adjusts your premiums.

For people leaving money to heirs, converting to Roth before death means the beneficiaries inherit tax-free money under the 10-year distribution rule instead of taxable money. The tax was paid by the original owner at their rate, potentially saving the heirs from paying at a higher rate during their peak earning years.

Conversions You Cannot Undo

Before the Tax Cuts and Jobs Act, you could recharacterize a Roth conversion back to a traditional IRA if the account dropped in value or if the tax bill was larger than expected. That option was permanently eliminated for conversions starting after December 31, 2017.

If you convert $200,000 and the account drops to $120,000 the next month, you still owe income tax on $200,000. There is no reversal. There is no exception.

This makes conversion sizing more important than ever. Converting an amount you can afford to pay tax on, in a year where the bracket math works, is the only protection against regret.

Common Mistakes

The most common Roth conversion mistakes, in order of how often they happened on calls at Schwab:

1. Converting without checking pro-rata exposure first. The tax bill is double what they expected because they forgot about an old rollover IRA.
2. Converting too much in one year and jumping two tax brackets instead of one. The marginal rate on the last $30,000 converted is 32% when the plan was to stay in the 24% bracket.
3. Ignoring the IRMAA impact for people within two years of Medicare enrollment. The conversion saves $8,000 in future taxes but costs $7,000 in Medicare surcharges.
4. Withholding taxes from the conversion amount instead of paying from outside funds. The withheld amount never makes it into the Roth and is treated as a distribution.
5. Not understanding the 5-year rule and taking early withdrawals of converted amounts, triggering the 10% penalty.
6. Assuming the conversion can be undone. It cannot, post-TCJA.

Frequently Asked Questions