Roth conversions — how they work
A Roth conversion moves money from a Traditional IRA (or another pre-tax retirement account) into a Roth IRA, with the converted amount becoming taxable in the year of the conversion — this article covers the mechanics, the tax consequences, the five-year clock that starts on every conversion, and the common pitfalls.
Steps / Explanation
A Roth conversion is a transaction that moves pre-tax retirement funds — typically from a Traditional Individual Retirement Account (IRA), a SEP IRA, a SIMPLE IRA, or an eligible employer plan — into a Roth IRA. Once the funds are in the Roth account, they follow Roth rules going forward: tax-free qualified distributions, no Required Minimum Distributions (RMDs) for the original owner, and the Roth ordering rules described in "Roth IRA — overview and eligibility."
The price of converting is paying ordinary income tax on the converted amount in the year of the conversion. Because the tax is paid up front, the strategy is most often considered by people who expect their tax bracket in retirement to be similar to or higher than today's, or who want to lock in tax-free growth on the converted assets. A conversion is a tax decision, not just a transfer — we recommend consulting a tax advisor or attorney for guidance specific to your situation.
What you can convert from
Roth conversions are available from:
Traditional IRAs, including SEP and SIMPLE IRAs (with a two-year holding requirement on SIMPLE IRAs before the first conversion). See "Traditional IRA — overview and eligibility" for the source-account rules.
Employer-sponsored plans like 401(k)s and 403(b)s, when the funds are eligible to be moved (typically after separation from service, or via in-service distributions if the plan allows).
Inherited Traditional IRAs, but only by a surviving spouse who has rolled the inherited account into their own IRA. Non-spouse beneficiaries cannot convert an inherited IRA.
There is no income limit on Roth conversions. Unlike direct Roth contributions, conversions are available regardless of your modified adjusted gross income (MAGI). That is the underlying mechanic that makes "Backdoor Roth contributions and conversions" possible for higher earners.
There is also no annual cap on the converted amount. You can convert any portion — or all — of an eligible balance in a single tax year.
Tax treatment
Three things happen on a conversion:
The converted amount is added to your taxable income for that year and taxed at your ordinary income tax rate. Pre-tax dollars in the source account become taxable; any after-tax basis (for example, non-deductible contributions reported on prior-year IRS Form 8606) is not taxed again.
The 10% additional early-withdrawal tax does not apply to the conversion itself. This is a specific exception in Internal Revenue Code (IRC) Section 72(t) for conversions. However, see the five-year rule below — withdrawing converted amounts within five years of the conversion can re-trigger the 10% tax in some circumstances.
A Form 1099-R is issued by the source custodian for the year of the conversion, and Form 5498 is issued by the receiving custodian. If basis is involved, you also file Form 8606 with your personal return to track it.
The conversion five-year rule (separate from the contribution five-year rule)
Each Roth conversion starts its own five-year clock. If you withdraw a converted amount within five tax years of the conversion and you are under age 59½, the 10% additional tax applies to that withdrawal — even though the conversion itself was not subject to it. This rule exists to prevent people from using a conversion as a way to access pre-tax funds early without the 10% penalty.
This is separate from the contribution five-year rule that applies to qualified distributions of earnings (covered in "Roth IRA — overview and eligibility"). Both clocks can run at the same time, and they are tracked independently. If you have done multiple conversions, each conversion has its own five-year window.
Pay the conversion tax from outside the IRA
The most common conversion mistake is paying the tax owed on the conversion out of the converted funds themselves. If you have the source custodian withhold tax from the conversion before it lands in the Roth, the withheld amount is treated as a distribution rather than a conversion. If you are under 59½, the withheld portion is also subject to the 10% additional tax.
The cleaner approach: convert the gross amount and pay the tax separately, from a non-retirement source. We recommend consulting a tax advisor or attorney for guidance specific to your situation.
Conversions and Required Minimum Distributions (RMDs)
Two timing rules to know once you are at RMD age:
You must take the year's RMD before you convert. An RMD is not eligible for conversion. If you have an RMD obligation in the year of a planned conversion, the RMD must come out first as a distribution, and only then can additional pre-tax funds be converted.
Roth IRAs have no lifetime RMDs for the original owner. Once converted, the Roth IRA balance is no longer subject to RMDs during your lifetime, which is one reason conversions are sometimes considered as part of a long-horizon plan. See "Required Minimum Distributions (RMDs) — rules and deadlines" for the full picture.
What you can no longer do — recharacterization
Before 2018, a Roth conversion could be undone by recharacterizing it back to the Traditional IRA, effectively reversing the tax event. The Tax Cuts and Jobs Act of 2017 eliminated recharacterization of conversions starting in tax year 2018. Conversions are now permanent. Once you convert, the tax consequence is locked in for that year. This is the single biggest change in conversion planning in the last decade and is the reason the conversion decision deserves more upfront analysis than it used to.
Common questions
Can I convert just part of my Traditional IRA?
Yes. There is no requirement to convert the full balance. Partial conversions are common and are sometimes used to fill the top of a particular tax bracket without crossing into a higher one.
If my Traditional IRA has both pre-tax and after-tax money, can I convert just the after-tax portion?
No. The IRS's pro-rata rule under IRC §408(d)(2) requires that any conversion be treated as proportionally pulling from your pre-tax and after-tax balances across all of your Traditional, SEP, and SIMPLE IRAs combined. You cannot cherry-pick the after-tax dollars. This is a major consideration for the "Backdoor Roth contributions and conversions" strategy.
Can I convert and then change my mind?
No, not since 2018. The Tax Cuts and Jobs Act eliminated recharacterization of Roth conversions. Once a conversion is processed, the tax event is final.
Does a conversion count as a contribution?
No. A conversion is its own category. It does not count against your annual contribution limit, and the annual contribution limit does not cap how much you can convert in a year.
Do I have to convert to my own Roth IRA, or can it go to a different one?
A conversion goes into a Roth IRA in your name. It can be the same Roth IRA you already have, or a new one — Digital Trust, the custodian for your account, can hold either. Contact the Service Team to start a conversion.
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