How the Tax Bill Works When You Convert to a Roth

You pay income tax on the converted amount in the year you move the money

When you convert money from a traditional IRA, SEP-IRA, or SIMPLE IRA to a Roth IRA, the IRS treats the conversion as a taxable distribution. The amount you convert becomes ordinary income on your tax return for that year. If you convert $50,000, you owe income tax on $50,000 of additional income—taxed at your marginal rate, whatever bracket you fall into.

The tax bill arrives when you file your return the following spring, not when you move the money. You do not pay it upfront to the IRA custodian. You report the conversion on Form 8606 (Nondeductible IRAs) and include the taxable amount on your Form 1040. The amount you owe depends on your total income that year and your tax bracket.

This is different from a withdrawal, where you could simply take the money and pay tax on it. A conversion is a deliberate move to shift money into a tax-free account, and the IRS requires you to pay the tax bill as the price of that shift.

Key Takeaways

• You owe income tax on the full amount converted, calculated at your ordinary income tax rate for that year.
• The tax is due when you file your return the following year, not when you execute the conversion.
• If your IRA holds both pre-tax and after-tax money, the pro-rata rule forces you to count a portion of the conversion as taxable based on the ratio of pre-tax to after-tax funds across all your IRAs.
• You can pay the tax from outside the IRA (recommended) or from the IRA itself, which reduces the amount actually converted.
• Conversions in years when your income is lower can reduce your tax bill compared to conversions in high-income years.

The pro-rata rule: why converting only after-tax money does not work the way you might think

Many people try to convert only the after-tax (non-deductible) portion of their IRA to avoid the tax bill. The pro-rata rule prevents this. The IRS looks at all your traditional IRAs, SEP-IRAs, and SIMPLE IRAs combined—not each account separately—and calculates what percentage of your total IRA balance is pre-tax money versus after-tax money.

If you have $100,000 in a traditional IRA (pre-tax) and $10,000 in after-tax contributions sitting in the same or different IRAs, your total IRA balance is $110,000. Of that, roughly 91% is pre-tax and 9% is after-tax. If you convert $10,000, the IRS says you are converting 91% pre-tax money and 9% after-tax money, regardless of which account the money came from. You owe tax on approximately $9,100 of that conversion.

The pro-rata rule applies in the year you convert. If you have a large after-tax balance but also significant pre-tax balances, converting only the after-tax portion will still trigger a tax bill on most of the conversion. This is one reason some people roll pre-tax IRAs into their employer 401(k) plan first—to remove that pre-tax money from the pro-rata calculation—before converting the remaining after-tax balance.

How your tax bracket determines what you actually owe

The tax you owe on a conversion is not a flat percentage. It depends on your marginal tax bracket—the rate applied to your last dollar of income. If you convert $50,000 and you are in the 24% federal bracket, you owe roughly $12,000 in federal tax on that conversion (before state taxes). If you are in the 32% bracket, the same conversion costs $16,000.

Your conversion can also push you into a higher bracket. If you earn $100,000 and convert $50,000, your taxable income for the year becomes $150,000. That extra $50,000 might move you from the 22% bracket into the 24% bracket partway through, meaning some of the conversion is taxed at 22% and some at 24%. Tax software and a tax professional can model this for you before you convert.

State income tax applies to conversions as well. If you live in a state with income tax, add that rate to your federal rate. Someone in the 24% federal bracket who lives in California (where the top rate is 13.3%) faces a combined rate of roughly 37% on a conversion—meaning a $50,000 conversion could cost $18,500 in total income tax.

Paying the tax bill: from the IRA or from your bank account

You have two ways to pay the income tax on a conversion. You can pay it from money outside the IRA—from your bank account, brokerage, or paycheck—or you can instruct the custodian to withhold the tax from the amount being converted.

Paying from outside the IRA is almost always better. If you convert $50,000 and pay the $12,000 tax bill from your checking account, the full $50,000 moves into the Roth. If you instruct the custodian to withhold $12,000 from the conversion to cover the tax, only $38,000 actually moves into the Roth, and you still owe tax on the full $50,000 converted—meaning you have a shortfall.

Withholding from the IRA also counts as a distribution, which can trigger the 10% early withdrawal penalty if you are under 59½ and do not meet an exception. Paying the tax from outside funds avoids this complication entirely.

Conversions and Medicare premiums: the hidden cost

A large conversion in one year can increase your Modified Adjusted Gross Income (MAGI), which affects your Medicare Part B and Part D premiums if you are on Medicare or will be soon. Medicare uses your income from two years prior to set your premiums, so a conversion in 2024 affects your 2026 premiums.

Higher MAGI can trigger Income-Related Monthly Adjustment Amounts (IRMAA), which are surcharges added to your Medicare premiums. Someone converting $100,000 might see their Medicare premiums jump by several hundred dollars per month for two years. This is not a tax on the conversion itself, but it is a real cost that should factor into your decision about when and how much to convert.

If you are approaching Medicare age, a tax professional can help you model conversions across multiple years to keep your MAGI below the thresholds that trigger IRMAA surcharges.

Timing conversions to lower your tax bill

Because the tax you owe depends on your income that year, converting in a low-income year costs less than converting in a high-income year. Someone who retires mid-year, takes a sabbatical, or has a year with unusually low business income might convert a larger amount at a lower tax rate than they could in a normal year.

This is why some people spread conversions across multiple years rather than doing one large conversion. Converting $20,000 per year for five years may cost less in total tax than converting $100,000 in a single year, depending on how each conversion affects your bracket and other income-sensitive benefits.

Tax software can show you what your tax bill would be at different conversion amounts. A tax professional can also run scenarios for you before you execute any conversion, so you know the cost upfront.

Conversions and the net unrealized appreciation rule

If the money you are converting includes employer stock held in a traditional IRA, the conversion is taxed on the full current market value of that stock. Unlike the net unrealized appreciation (NUA) strategy available for company stock in a 401(k)—where you can defer tax on the gain—there is no NUA break for IRAs. The entire value, including all gains, is taxable income in the year of conversion.

This is one reason to be cautious about converting an IRA that holds concentrated positions in a single stock. The tax bill can be substantial. If you have employer stock in both an IRA and a 401(k), the 401(k) may offer a better tax outcome through an NUA distribution, while the IRA conversion should wait or be done in smaller amounts.

Frequently Asked Questions

Can I undo a conversion if the tax bill is higher than I expected?

You can recharacterize a conversion back to a traditional IRA, but only if you do so by the tax filing deadline (including extensions) for the year of conversion. Recharacterization reverses the conversion entirely, and you owe no tax on it. However, you cannot cherry-pick which conversions to undo—if you recharacterize, you must recharacterize the entire conversion for that year.

Do I owe the 10% early withdrawal penalty on a conversion if I am under 59½?

No. Conversions themselves do not trigger the 10% early withdrawal penalty, even if you are under 59½. However, if you withdraw money from the Roth within five years of the conversion, you may owe the penalty on the earnings portion of that withdrawal. The five-year rule applies separately to each conversion year.

What if I convert in December but do not have the money to pay the tax bill until April?

You can file an extension (Form 4868) to push your tax filing deadline to October, which gives you more time to pay. However, interest and penalties accrue on any unpaid tax from the original April deadline. It is better to pay the tax by April 15 if possible, even if you have not filed your return yet.

Does a conversion affect my Social Security benefits?

Conversions increase your income for the year, which can affect the taxation of Social Security benefits if you are already receiving them. The calculation depends on your combined income (adjusted gross income plus half your Social Security benefits). A large conversion might push you into a higher tier where more of your benefits become taxable. This is separate from Medicare IRMAA but worth modeling with a tax professional if you are on Social Security.

Can I convert only the gains in my IRA and leave the contributions behind?

No. A conversion moves money from one account type to another; you cannot split a single dollar between the two accounts. You convert a specific dollar amount, and the pro-rata rule determines what portion of that amount is taxable based on your overall IRA balance. You cannot designate which dollars (contributions or gains) move over.