How a Roth Conversion Works

The mechanics are straightforward. You tell your brokerage or custodian to move money from your traditional IRA to your Roth IRA. The transferred amount gets added to your taxable income for the year — treated as ordinary income, not capital gains. You’ll owe federal income tax (and state tax, if applicable) on every dollar converted, per IRC Section 408A.

There’s no income limit on Roth conversions. Someone earning $500,000 can convert just as freely as someone earning $50,000. This is different from Roth IRA contributions, which have income caps. The removal of the conversion income limit in 2010 is what made the backdoor Roth IRA strategy possible.

You can convert any amount — $5,000, $50,000, $500,000, or your entire traditional IRA balance. There’s no minimum or maximum. Partial conversions are common and often smarter than converting everything at once.

The Tax Hit: What You’ll Actually Owe

The converted amount stacks on top of your other income for the year. That’s the part people underestimate.

Say you earn $90,000 in salary and convert $60,000 from your traditional IRA. Your taxable income for the year jumps to $150,000 (before deductions). That $60,000 conversion gets taxed at your marginal rates — which for a single filer in 2025 means part of it hits the 22% bracket and part hits the 24% bracket.

But it doesn’t stop at federal income tax. A large conversion can also:

• Push you into the 3.8% Net Investment Income Tax if your MAGI exceeds $200,000 (single) or $250,000 (MFJ). The conversion income itself isn’t subject to NIIT, but it can push your other investment income over the threshold.
• Increase your Medicare premiums. IRMAA (Income-Related Monthly Adjustment Amount) surcharges kick in when your MAGI exceeds $106,000 (single) or $212,000 (MFJ). These surcharges apply two years after the high-income year. A big 2025 conversion means higher Medicare premiums in 2027.
• Make your Social Security benefits more taxable. If you’re already receiving Social Security, the conversion income can push up to 85% of your benefits into taxable territory.
• Affect financial aid eligibility. Conversion income shows up on the FAFSA as income, which can reduce college financial aid for the following year.

These cascading effects are why a $60,000 conversion can effectively cost more than 24% in taxes when you factor in everything it triggers. Work through the full picture before converting. This is where our tax advisory services pay for themselves.

When Roth Conversions Make the Most Sense

The golden rule: convert when your tax rate today is lower than what you expect it to be when you withdraw the money. Easier said than figured out, but these scenarios tilt the math strongly in favor of converting:

Low-Income Years

Lost your job? Took a sabbatical? Started a business that’s not profitable yet? A year with unusually low income is the best time to convert. You can fill up the lower tax brackets (10%, 12%, 22%) with conversion income and pay far less than you would in a normal earning year.

Early Retirement (Before Social Security and RMDs)

The gap between when you stop working and when Required Minimum Distributions start at age 73 (under the SECURE 2.0 Act) is a conversion sweet spot. Your income may be near zero, giving you room to convert at the 10% or 12% bracket. Once RMDs begin, that window closes — your traditional IRA forces income onto your return whether you want it or not.

Market Downturns

If your traditional IRA drops 30% in a market crash, converting at the depressed value means you pay tax on the lower amount. When the investments recover (inside the Roth), all that growth is tax-free. Converting $70,000 worth of investments that were recently worth $100,000 saves you tax on $30,000 of future recovery.

Before Tax Rates Increase

The TCJA’s individual tax rates are scheduled to expire after 2025. If the 2026 tax brackets revert to pre-TCJA levels, marginal rates will increase across most brackets. Converting in 2025 at the current lower rates could save you thousands compared to converting in 2026 or later at higher rates. This is the most time-sensitive argument for conversion right now.

Partial Conversions: The Smarter Approach

Converting your entire traditional IRA in one year almost always creates a massive tax bill that overshoots the optimal amount. Partial conversions spread the tax impact across multiple years.

The strategy: each year, convert just enough to fill up your current tax bracket without jumping into the next one. If you’re in the 22% bracket and have $30,000 of room before hitting the 24% bracket, convert $30,000. Repeat next year. Over five to ten years, you can convert a large balance at consistently lower rates.

This is tedious to calculate manually. You need to know your projected income, deductions, and the exact bracket cutoffs for each year. It’s one of the most common things we model for clients during year-end tax planning.

The Five-Year Rule

Each Roth conversion has its own five-year clock per IRC Section 408A(d)(3). If you withdraw the converted amount within five years and you’re under age 59 1/2, you’ll owe a 10% early withdrawal penalty on the converted amount (though not additional income tax, since you already paid that at conversion).

After age 59 1/2, the five-year rule becomes mostly irrelevant for conversions — you can withdraw converted amounts penalty-free regardless of how recently you converted. But for younger converters, the five-year clock matters and should factor into your liquidity planning.

There’s a separate five-year rule for Roth earnings: your Roth IRA must have been open for at least five years (starting from your first-ever Roth contribution or conversion) before you can withdraw earnings tax-free. This clock starts once and doesn’t reset with each conversion.

Roth Conversion vs. Keeping Your Traditional IRA

Not everyone should convert. Here’s when staying in the traditional IRA makes more sense:

• You expect to be in a much lower tax bracket in retirement. If you earn $300,000 now and expect to live on $60,000 in retirement, paying tax at your current rate to convert is a losing trade.
• You’ll need the money within five years and you’re under 59 1/2. The early withdrawal penalty erases much of the benefit.
• You’d have to pull from the IRA itself to pay the tax bill. Using converted funds to pay conversion taxes defeats the purpose. You lose the dollars that would have grown tax-free, and if you’re under 59 1/2, you may owe the 10% penalty on the portion used for taxes.
• You plan to leave the IRA to charity. Charities don’t pay income tax on IRA distributions. Converting to Roth and paying tax just to leave it to a tax-exempt entity wastes money.
• You’re in a high-income year with no room in lower brackets. Converting at the 35% or 37% bracket rarely makes mathematical sense unless you expect rates to go even higher permanently.

Reporting on Form 8606

Every Roth conversion must be reported on Form 8606 (Part II) with your tax return. This form calculates how much of the conversion is taxable — which is straightforward if all your traditional IRA money was pre-tax (100% taxable), but gets more complicated if you have after-tax basis from nondeductible contributions.

If you’ve made nondeductible traditional IRA contributions in prior years, the pro-rata rule under IRC Section 408(d)(2) applies to your conversion. You can’t convert just the after-tax money and leave the pre-tax money behind. The IRS treats every dollar coming out as a proportional mix of pre-tax and after-tax funds, based on your total traditional IRA balance.

Keep every Form 8606 you’ve ever filed. The basis figures carry forward year to year, and losing track of them can result in paying tax twice on the same money.

State Tax Considerations

Most states tax Roth conversions the same as federal — as ordinary income. But a few states offer planning opportunities:

• No-income-tax states: If you’re converting while living in Florida, Texas, Nevada, or another no-income-tax state, you avoid state tax entirely on the conversion. If you later move to New York, the Roth withdrawals are still state-tax-free.
• States that don’t tax retirement income: Some states exempt retirement distributions from income tax. If you plan to retire in such a state, converting now (and paying your current state’s tax) could be a net loss versus taking traditional IRA distributions tax-free at the state level later.

For NYC residents, the combined federal, state, and city tax on a conversion can easily exceed 40% at higher income levels. Run the state-level numbers, not just federal. See our California capital gains and IRA comparison guides for more state-specific context.

Sources & References

• IRC Section 408A — Roth IRAs
• IRC Section 408 — Individual Retirement Accounts (Pro-Rata Rule)
• IRC Section 1411 — Net Investment Income Tax
• IRS Publication 590-B — Distributions From IRAs
• IRS Publication 915 — Social Security and Equivalent Railroad Retirement Benefits
• IRS Form 8606 — Nondeductible IRAs
• SSA Medicare Premiums and IRMAA Surcharges
• IRS Roth IRA Contribution Limits for 2025