9 Things to Know Before Converting a Traditional IRA to a Roth IRA
A Roth conversion can move future growth into a Roth IRA, but it can also create a current-year tax bill. The key question is whether recognizing income now makes sense in your situation.
Quick Answer
- Untaxed traditional IRA amounts converted to Roth generally become taxable income in the conversion year.
- You can convert part or all of a traditional IRA.
- Nondeductible basis can reduce the taxable portion, but Form 8606 aggregation rules matter.
- A large conversion can affect your marginal tax bracket and other income-based tax items.
- A completed Roth conversion cannot simply be recharacterized back to traditional.
- Roth withdrawal rules contain different five-year concepts.
1. A Conversion Is a Tax-Timing Decision
Traditional IRA money that has never been taxed generally becomes taxable when converted. Qualified Roth IRA distributions can later be tax-free if requirements are met.
A conversion does not erase tax on untaxed traditional IRA money; it generally accelerates recognition into the conversion year.
2. You Can Convert Only Part
The IRS permits conversion of part or all of a traditional IRA. Partial conversions can help control how much additional taxable income you recognize in one year.
3. Model the Whole Tax Return
Additional income can affect more than the rate applied to the conversion. Depending on your situation, it can interact with deductions, credits and other income-sensitive provisions.
Before a large conversion, use a full-year tax projection rather than last year’s tax bracket alone.
4. Nondeductible Basis Changes the Calculation
Prior nondeductible contributions can create basis that has already been taxed. Form 8606 tracks it. But relevant traditional, SEP and SIMPLE IRAs are aggregated for the calculation, so you generally cannot isolate basis in one account and ignore the others.
5. Backdoor Roth Is a Different Use Case
A Backdoor Roth commonly starts with a new nondeductible contribution and conversion. A general Roth conversion may involve years of accumulated pre-tax assets and therefore a much larger tax bill.
6. Think Before Withholding Tax From the IRA
If part of the IRA is withheld for tax, that amount does not arrive in the Roth IRA. Depending on age and circumstances, amounts not converted can also raise additional-tax issues.
Decide how the tax will be paid before clicking through a conversion screen.
7. Timing Can Matter, but the Future Is Uncertain
Lower-income years can make conversions more attractive, and some people spread conversions across years. But future tax law and personal circumstances cannot be known with certainty.
8. Do Not Mix Up the Roth Five-Year Rules
Qualified Roth IRA distributions have a five-year requirement plus a qualifying condition. Separately, taxable conversion amounts can have their own five-year periods for the 10% additional tax on certain early distributions. A separate period generally applies to each conversion.
9. Keep Form 8606 and Conversion Records
Keep prior Forms 8606, conversion confirmations, year-end statements, Forms 1099-R and Forms 5498. The custodian does not know your complete basis across all relevant IRAs.
Before You Convert a Traditional IRA to a Roth IRA Checklist
- Estimate full-year income.
- Decide whether a partial conversion is preferable.
- Find prior Forms 8606.
- Inventory traditional, SEP and SIMPLE IRAs.
- Estimate the taxable conversion amount.
- Decide how taxes will be paid.
- Review Roth withdrawal rules if you may need the money soon.
- Save all tax documents.
FAQ
Is every dollar converted taxable?
Not necessarily. Previously untaxed amounts generally are; properly tracked after-tax basis affects the calculation.
Can I convert only part?
Yes.
Can I undo the conversion?
A completed Roth conversion cannot be recharacterized back to traditional under current rules.
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The Bottom Line
A Roth conversion is a tax decision before it is an investment decision. Know your basis, model the current-year tax effect, consider partial conversions and understand withdrawal rules first.