Free Guide to Roth IRA Conversion Information

What Is a Roth IRA Conversion and How Does It Work

A Roth IRA conversion is when you move money from a traditional retirement account into a Roth IRA. The most common type of conversion involves taking funds from a traditional IRA, SEP IRA, or SIMPLE IRA and transferring them to a Roth account. Some people also convert money from employer-sponsored plans like 401(k)s or 403(b)s, though this typically requires specific plan provisions to allow such conversions.

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The basic mechanics are straightforward. You initiate a transfer with your financial institution, and they move the funds from one account type to the other. However, the IRS treats this as a taxable event. The amount you convert becomes taxable income in the year you perform the conversion. For example, if you convert $50,000 from a traditional IRA to a Roth IRA, you must report that $50,000 as income on your tax return for that year, which could push you into a higher tax bracket temporarily.

Understanding the reasons people consider conversions helps clarify the strategy. Many people convert when they expect their tax rate to be lower in that year than it will be later in retirement. If you had a year with reduced income—perhaps you left a job, took unpaid leave, or had a business loss—converting during that year means paying taxes at a lower rate on that conversion amount.

Another scenario involves younger workers who have lower incomes now but expect significantly higher earnings later. Converting at a younger age when tax rates may be lower locks in that tax treatment. The funds then grow tax-free inside the Roth account, and withdrawals in retirement come out without additional taxes.

Practical takeaway: A Roth conversion moves pre-tax retirement savings into a tax-free account, but it creates a tax bill in the conversion year. Before considering a conversion, review your current income, expected future income, and whether you have funds outside of retirement accounts to pay the resulting tax bill.

Tax Implications and Consequences of Converting

The tax impact of a Roth conversion is the most important factor to understand. When you convert traditional IRA funds to a Roth IRA, the converted amount is added to your income for that tax year. If you convert $40,000, you report an additional $40,000 in income on your federal tax return. This increased income could affect multiple aspects of your tax situation beyond just moving to a higher tax bracket.

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Higher reported income can trigger phase-outs for other tax benefits. For instance, certain education credits, the child tax credit, and deductions for student loan interest have income limits. If a conversion pushes your income above these thresholds, you may lose some or all of these credits and deductions. Additionally, higher income can affect Medicare Part B and Part D premiums if you're close to retirement age—the Social Security Administration uses income from two years prior to determine these premiums.

There's also the question of pro-rata taxation if you have both pre-tax and after-tax money in traditional IRAs. The IRS doesn't allow you to pick and choose which dollars you convert. If you have $100,000 in a traditional IRA with $80,000 in pre-tax contributions and $20,000 in after-tax contributions, a $50,000 conversion includes $40,000 in taxable income and $10,000 that isn't taxed. This pro-rata rule applies across all your traditional, SEP, and SIMPLE IRAs combined.

State income taxes apply to conversions in most states, though some states don't tax retirement income. If you live in a state with income taxes, your conversion creates state tax liability in addition to federal taxes. The amount varies by state—some states tax all conversion income, while others may provide partial exemptions for retirement account distributions.

You'll also need enough funds to pay the tax bill that results from the conversion. Many people make the mistake of using money from inside the IRA to pay taxes, which means converting even more money to cover those taxes. This creates a compounding effect. It's generally better to pay conversion taxes from non-retirement savings if possible.

Practical takeaway: Calculate your full tax picture before converting by estimating the additional income tax at your marginal rate, checking whether credits or deductions phase out, reviewing state taxes, and ensuring you can pay taxes from outside retirement accounts.

Income Limits and Who Can Perform Conversions

Unlike Roth IRA contributions, which have strict income limits, there are no income limits on who can perform a Roth conversion. This is a significant distinction. Even high-income earners who cannot directly contribute to a Roth IRA may be able to convert traditional retirement savings into a Roth account. This loophole has been important for affluent savers who want Roth account benefits despite exceeding contribution income limits.

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For context, in 2024, direct Roth IRA contributions are restricted for single filers with modified adjusted gross income (MAGI) over $146,000 and married couples filing jointly over $230,000. However, a person with $500,000 in income can still perform a Roth conversion. There's no dollar limit on the conversion amount itself, though the tax consequences increase with larger conversions.

Anyone with a traditional IRA, SEP IRA, SIMPLE IRA (though SIMPLE conversions have special rules and waiting periods), or an employer plan with conversion provisions can explore converting to a Roth. Self-employed individuals, business owners, employees with access to employer plans, and retirees all potentially have conversion options depending on their specific account types.

There is one historical rule worth noting: the "backdoor Roth" strategy allowed high-income earners to contribute to a traditional IRA (which has no income limits) and then immediately convert to a Roth. The Build Back Better Act, which passed in modified form as the Inflation Reduction Act, included provisions that would have eliminated this strategy starting in 2032, but subsequent legislative changes have created uncertainty about these rules. The tax landscape around conversions continues to evolve, making it important to verify current rules.

Conversions available to you depend partly on your employer plan's specific terms. Some 401(k) and 403(b) plans allow in-service conversions, where you convert money while still employed. Other plans only allow conversions after you retire or leave the employer. You'd need to review your plan documents or contact your plan administrator to understand what options are available through your employer.

Practical takeaway: Anyone with traditional retirement savings can potentially convert to a Roth regardless of current income, but understanding what accounts you have access to and your employer plan rules determines what conversion options are actually available to you.

Step-by-Step Process for Executing a Conversion

Executing a Roth conversion is relatively straightforward from a procedural standpoint, though planning the conversion itself requires careful thought. The basic process involves contacting your financial institution and requesting a conversion or rollover to a Roth IRA.

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First, ensure you have an open Roth IRA account at your financial institution. If you don't already have one, you'll need to open it. This typically involves completing an account application with basic personal information and identifying the account type as a Roth IRA. Opening an account usually takes only a few business days and involves no fees.

Next, contact your current financial institution that holds the traditional IRA or retirement account you want to convert. Ask about their conversion process. Some institutions facilitate conversions directly. Others may use a trustee-to-trustee transfer, which is the most common method. In a trustee-to-trustee transfer, your current financial institution sends the funds directly to the new institution holding your Roth IRA. This method keeps the funds in institutional custody and avoids the 60-day rollover rule complications.

You'll complete a conversion form from either your current institution or the institution where you want the Roth IRA to be established. The form asks how much you want to convert and specifies the destination Roth IRA account. Some institutions allow you to specify whether the conversion should come from specific types of funds (like only employer contributions versus earnings) if you have those options within your account.

The actual transfer typically takes 5 to 10 business days, though it can sometimes take longer depending on the institutions involved and the complexity of your accounts. Once the funds arrive in your Roth IRA, the conversion is complete from an operational standpoint.

The critical step comes