Roth IRA Conversions: Rules, Restrictions, and Taxes
This post covers why you would (or wouldn’t) consider a Roth IRA conversion and many other related topics including how to convert your balances. It also answers commonly asked questions about this strategy. Let’s dive in!
What is a Roth IRA conversion?
A Roth IRA conversion is the process of taking a portion (or all) of your balances from either an existing traditional IRA, SEP, SIMPLE IRA, or employer-sponsored retirement plan (e.g., a 401(k) or 403(b)) and then converting them to a Roth IRA.
What are some Roth IRA conversion benefits?
Roth IRAs offer unique tax advantages and flexibility, making them an attractive option for many investors due to the following reasons…
Tax-free investment growth
You won’t pay a single penny in taxes on the money you make from your investments following a Roth conversion.
Tax-free withdrawals in retirement
Another advantage of a Roth IRA conversion is the ability to enjoy tax-free withdrawals in retirement. Unlike with a traditional IRA—which dictates you pay taxes on any tax-deductible contributions and investment gains made—Roth IRA withdrawals are tax-free, provided you meet specific requirements (which we’ll touch on shortly).
This specific tax benefit is precisely why Roth IRAs are appealing to so many investors, especially those with tax-deferred investments such as traditional IRAs and 401(k)s. Having a mix of investments (some tax-deferred, some not) is often a sound strategy since it’s extremely difficult to predict what your tax rate will look like during retirement, particularly if it’s still several years away.
More flexibility to make withdrawals in retirement
Another benefit of a Roth IRA conversion is the ability to steer clear of required minimum distributions (RMDs): the IRS-specified amount of money you must withdraw from your account, typically beginning at age 73 (age 75, beginning in 2033). Unlike its IRA counterpart, a Roth IRA isn’t subject to any RMD rules—meaning you aren’t required to make withdrawals at any point during your lifetime. The money in a Roth IRA can thus remain in the account and continue to grow tax-free for as long as you want, maximizing your retirement savings.
Tax-free Roth IRA inheritance
Finally, Roth IRAs also have fewer restrictions than traditional IRAs with respect to asset inheritance, sparing beneficiaries the pain of paying taxes—provided the account was open for at least five years. They thus serve as an effective estate-planning tool that allows you to pass assets to beneficiaries tax-free.
What are some downsides of a Roth IRA conversion?
When you convert money from a traditional account to a Roth account, you’ll need to pay federal—and possibly state—taxes on all funds moved into the latter. Not surprisingly, the most significant drawback of a Roth IRA conversion is this same tax hit. Conversions can also affect you in other ways, however, often referred to as “Roth IRA conversion traps”. Here are some specifics in this regard…
Possible Medicare surcharges
The amount converted to a Roth IRA is taxed as ordinary income, possibly pushing you into a higher federal income tax bracket and negatively impacting those nearing Medicare eligibility. For example, you may pay IRMAA (income-related monthly adjustment amount) on top of Medicare premiums if your income is high enough, with these surcharges based on your modified adjusted gross income—a key factor determining Medicare costs. The surcharge is calculated based on tax returns from two years prior (so your 2026 income determines your IRMAA in 2028, your 2027 income affects your IRMAA in 2029, and so on). Surcharges can add up to several hundred dollars per month, depending on your income.
Potentially higher Social Security taxes
If the conversion significantly boosts your income, it may trigger taxes for a larger portion of your Social Security benefits. The IRS uses a tiered system based on your income to determine how much of your Social Security is taxable, so the more you make, the more taxes you’ll pay.
Capital gains
Another consideration is capital gains taxes. If the Roth conversion pushes you into a higher tax bracket, your capital gains could be taxed at a higher rate. Those whose income is low enough—below $49,450 in 2026 (or $98,900 for married couples filing jointly)—can avoid capital gains taxes altogether, however, especially beneficial for retirees living on a fixed income.
College financial aid
If your children are in college (or will be soon) and you’re applying for financial aid, converting a Roth IRA could affect your eligibility because the amount converted is considered income and reported on the Free Application for Federal Student Aid (FAFSA)—potentially increasing your Student Aid Index (SAI) and lowering your financial aid package. The good news? Some universities may, upon request, account for Roth conversion income in their private aid calculations. Federal aid formulas don’t make this same adjustment, however, meaning those relying on this type of aid may want to postpone a Roth conversion until after college graduation.
How Roth IRA conversions are taxed
Roth IRA conversions are taxed based on the type of funds you’re converting, as follows…
Converting only pre-tax contributions
If all retirement accounts you’re converting from contain only pre-tax contributions, the total amount converted is taxed as ordinary income at your regular rate.
Converting both pre-tax and after-tax contributions
If the account you’re converting from contains both pre-tax and after-tax contributions, reference the IRS Pro-Rata Rule to determine your taxes as the IRS will consider all IRA accounts—not just the one used for the conversion—and tax you proportionally, with the taxable part of the conversion subject to ordinary income tax. For example, if you have $50,000 in two traditional IRAs and $20,000 representing after-tax contributions (money already paid taxes on), 40% of your IRA balance is after-tax; if you convert $30,000 to a Roth IRA, you won’t be taxed on $12,000 (40% of $30,000) with the remaining $18,000 taxed at your ordinary income tax rate.
When taxes are due on a Roth IRA conversion
When you convert funds to a Roth IRA, the converted amount is added to your taxable income for that same year with taxes usually due when you file your annual tax return (e.g., by April 15, 2027 for 2026 Roth IRA conversions). Those required to pay estimated taxes may need to make quarterly payments throughout the year to avoid penalties, however. Note that while you can choose to withhold taxes from the amount you’re converting, this means a smaller portion of money in your Roth account will grow tax-free. Those under age 59½, meanwhile, should know the IRS treats withheld taxes as a premature distribution and taxes withheld are subject to an additional 10% penalty.
When to consider a Roth IRA conversion
A Roth IRA conversion is most advantageous when you can pay taxes on the converted amount at a lower tax rate. Careful tax planning is essential; evaluating both your current and projected future tax rates will help you identify the best time to convert. Roth IRA conversion becomes especially appealing if your income drops significantly such as after a job loss, during a low-income year, or after retiring before Social Security or required minimum distributions (RMDs) kick in. It’s also sometimes advantageous if your investments have sharply declined in value or if income tax brackets are expected to rise.
Roth IRA conversion eligibility
Converting to a Roth IRA is an option available to anyone with a traditional IRA regardless of income level or tax filing status. Unlike income limits associated with direct Roth IRA contributions, there are no such restrictions when it comes to Roth IRA conversions—meaning that even if your income exceeds the threshold for regular Roth IRA contributions, you can still convert a traditional IRA to a Roth.
How to perform a Roth IRA conversion
You can roll over your IRA assets into a Roth IRA via two primary methods, a direct rollover or indirect rollover, as follows…
Direct rollover
A direct rollover, the simplest and oft-recommended approach, tasks your current plan administrator with sending the funds directly to your new Roth IRA account with you personally never taking possession of the money. This option is straightforward and efficient with no taxes withheld from the transferred around.
Indirect rollover
An indirect rollover (AKA a “60-day rollover”) allows you to temporarily withdraw the funds via a check you must deposit into a new IRA within 60 days to avoid income taxes and a 10% early withdrawal penalty (if you’re under age 59½).
You can use the money for any purpose during this window, and the plan administrator is required to withhold 20% of the distribution for taxes before issuing your check. Should you fail to redeposit the entire original amount (beyond the net amount received) within the 60-day period, the entire rollover is treated as a taxable distribution subject to income taxes and potential penalties (e.g., some people use an indirect rollover as a short-term loan when relocating for a new job, expecting to repay the funds after receiving reimbursement from their employer). Keep in mind the IRS allows only one indirect rollover per 12-month period, and the transfer must occur between just two accounts.
Withdrawing funds from Roth IRA conversions
Important rules dictate when you can withdraw your money in the absence of taxes or penalties, especially concerning investment earnings, when you convert funds into a Roth IRA. These include…
Five-year rule for earnings
Any earnings generated from converted funds must remain in the account for five years, and you must be at least 59½ years old to withdraw them tax-free. A failure to meet these conditions will task you with paying taxes on these earnings as well as a 10% penalty.
Five-year rule for Roth conversions
Those under 59½ must abide by an additional requirement: the need to wait five years from the time of the conversion to withdraw funds from the amount converted—including both principal AND earnings. A 10% early withdrawal penalty may apply to the amount withdrawn if you don’t comply with this rule, with the earnings portion subject to income tax. Note this rule applies only to converted amounts and not to any earnings generated post-conversion.
Five-year waiting period particulars
The five-year waiting period begins on January 1 of the year in which you convert your IRA. If you complete the conversion in December 2026, for example, the waiting period actually starts on January 1 of that same year. Each conversion made has its own separate five-year period, meaning if you perform one Roth IRA conversion in 2026 and another in 2027, the five-year period for your 2026 conversion starts on January 1, 2026 (with the period for your 2027 conversion beginning on January 1, 2027).
Exceptions to the Roth five-year rule
Specific situations can help you skirt the early withdrawal penalty on the five-year rule for a Roth IRA, such as making a $10,000 withdrawal to fund a first-time home purchase, withdrawing up to $5,000 in the year following the birth or adoption of a child, withdrawing to pay for qualified higher education expenses (books, tuition, fees, and/or room and board) for you or an immediate family member, or taking out funds to cover unreimbursed medical expenses (those exceeding 10% of your adjusted gross income). If you happen to lose your job and thus your health insurance, meanwhile, you can use Roth IRA funds to pay for insurance premiums while you're unemployed.
In sum: is a Roth IRA conversion a good idea?
While adding a Roth IRA to your investment portfolio is often recommended, whether or not you should actually pursue a Roth conversion is an entirely different story given the need to consider many tax-related implications (as discussed in this article). Thankfully, a CFP® professional can help you evaluate whether a conversion makes sense for you given your own unique situation.
Have questions about Roth IRA conversions? Schedule a free consultation with one of our CFP® professionals to get them answered.
FAQs
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The deadline for converting funds to a Roth IRA is December 31 each year.
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Age limits on Roth conversions don’t exist, meaning you can convert any portion of pre-tax IRA funds into a Roth IRA whenever you want no matter your age.
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The biggest drawbacks are the tax hit you’ll take on the conversion amount and that you can’t touch the converted money for at least five years without facing a penalty.
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The Roth conversion trap speaks to unexpected consequences that can arise from this strategy, as outlined in this article (e.g., Medicare surcharges, the five-year Roth rule penalty, and Social Security taxes).
About the author
The content in this post was developed by our team of writers and reviewed by our team of CFP® professionals here at Vision Retirement.
Retirement Planning | Tax Preparation | Investment Management
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. Schedule a no-obligation consultation with one of our financial advisors today!
Disclosures:
This document is a summary only and is not intended to provide specific tax advice or recommendations for any individual or business.
Traditional IRA account owners must consider many factors before performing a Roth IRA conversion, which primarily include income tax consequences on the converted amount during the conversion year, withdrawal limitations from a Roth IRA, and income limitations for future Roth IRA contributions. You’re also required to take a required minimum distribution (RMD) in the year you convert and must do so before converting to a Roth IRA.
