What Is a Roth IRA Conversion and How Does It Work?

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A Roth IRA conversion lets you move money from a traditional IRA or 401(k) into a Roth IRA. You’ll pay taxes on the amount you convert now, but you’ll gain tax-free growth and withdrawals later in retirement.

In simple terms: you’re trading a short-term tax bill for long-term tax freedom. For many savers — especially those expecting higher taxes in the future — that can be a smart move.

According to Fidelity, more than 1 in 5 retirement savers completed or planned a Roth conversion in the past year, as tax-efficient strategies grow in popularity among retirees.

Here’s what to know about the rules, taxes and best timing for a Roth IRA conversion — plus how to decide if it fits your long-term financial goals.

Quick Facts: Roth IRA Conversion

Why Consider a Roth IRA Conversion?

The biggest appeal of a Roth IRA conversion is long-term tax savings. Once you convert and pay taxes on the money, your future withdrawals — including investment growth — are completely tax-free.

Here are some of the top reasons investors choose this strategy:

• Tax-Free Income Later: Future withdrawals aren’t taxed, even if rates rise.
• No RMDs: Unlike traditional IRAs, you’re not required to withdraw funds at age 73.
• Estate Planning Benefits: Heirs can receive tax-free distributions, preserving more of your legacy.
• Tax Diversification: A Roth account helps balance taxable and tax-free income in retirement.

How a Roth IRA Conversion Works

Converting to a Roth IRA is a taxable event. When you move pre-tax funds — from a traditional IRA, SEP IRA, SIMPLE IRA (after two years) or 401(k) — the amount you convert is added to your taxable income for that year.

If you convert $50,000, that $50,000 is taxed as ordinary income. Depending on your total earnings, this could bump you into a higher tax bracket, so timing matters.

Conversion Options

1. Direct (Trustee-to-Trustee) Transfer: Safest and simplest — funds move directly between institutions, avoiding withholding taxes.
2. 60-Day Rollover: You receive funds and must deposit them into your Roth IRA within 60 days to avoid penalties.
3. Gradual Conversions: Convert in smaller amounts over several years to stay in a lower bracket and reduce your annual tax hit.

Taxes on Roth IRA Conversions

There are several tax rules and considerations to keep in mind when it comes to Roth IRA conversions. Here’s a breakdown of some of the most important:

Conversion Taxed as Ordinary Income

The converted amount is taxed at your regular income rate. Federal tax brackets in 2025 range from 10% to 37%, depending on your income.

For example:

• If you earn $100,000 and convert $20,000, your taxable income rises to $120,000.
• That could bump part of your income into a higher bracket, costing an extra $2,000 to $3,000 in taxes.

Schwab recommends converting smaller portions annually to “ladder” your taxes and keep your income in check.

State Taxes and Medicare Surcharges

Your state may tax conversions, too. States like California and New York tax all IRA income, while states like Florida and Texas don’t.

Also, because conversions increase your modified adjusted gross income (MAGI), your Medicare premiums could rise temporarily due to IRMAA surcharges, which affect high earners making over $103,000 (single) or $206,000 (married) in 2025.

The 5-Year Rule for Roth Conversions

Each conversion has its own five-year waiting period before you can withdraw earnings tax-free. The clock starts on January 1 of the year you convert.

If you take out money earlier — and you’re under 59½ — you’ll owe a 10% penalty plus taxes.

Here’s a simple example:
If you convert funds in 2025, you can withdraw your earnings tax and penalty-free starting January 1, 2030 (assuming you’re 59½ or older).

IRS data shows early withdrawals are one of the top causes of tax penalties among retirement savers, costing Americans over $6 billion in penalties annually.

Benefits of a Roth IRA Conversion

• Tax-Free Growth and Withdrawals: Once converted, all future earnings and qualified withdrawals are tax-free.
• No RMDs: Roth IRAs don’t require minimum distributions, giving you more control.
• Estate Planning Advantages: Beneficiaries inherit tax-free assets, minimizing the tax burden.
• Tax Flexibility in Retirement: With both pre-tax and post-tax savings, you can better manage your income and tax exposure each year.

Drawbacks and Risks

• Large Tax Bill in Conversion Year: The converted amount counts as income, so converting too much at once can cause a tax spike.
• Possible Medicare Premium Increases: Higher income after conversion could trigger short-term surcharges.
• Less Liquidity: If you pay conversion taxes using IRA funds, you’ll reduce your total savings and possibly face penalties if you’re under 59½.

When a Roth IRA Conversion Makes Sense

You’ll likely benefit most from a Roth IRA conversion if:

• You’re in a low-income year, like early retirement or during a market downturn.
• You expect higher taxes in the future (the current lower rates under the 2017 Tax Cuts and Jobs Act expire in 2026).
• You want to avoid RMDs and create tax-free retirement income.
• You’re doing estate planning and want to pass wealth tax-free to heirs.

Alternatives to a Roth IRA Conversion

• Backdoor Roth IRA: High earners can contribute to a traditional IRA, then convert those funds into a Roth — bypassing contribution income limits.
• Traditional IRA: If you expect to be in a lower tax bracket later, it may make sense to stay with tax-deferred savings.
• Taxable Brokerage Account: Offers flexibility and liquidity, though gains are taxed annually.

Final Take to GO: A Smart Move — If You Plan It Right

A Roth IRA conversion can be a powerful way to reduce future taxes and create lifelong tax-free income — but only if you time it right. The key is to convert gradually, plan for the tax bill and avoid using your retirement funds to pay conversion taxes.

Final Take: If you expect to be in a higher tax bracket later, converting now could save you significantly in the long run. Talk with a financial or tax advisor to build a conversion plan that fits your income, timeline and retirement goals.

Use the GoBankingRates Retirement Calculator to estimate how a conversion could affect your future savings.

Information is accurate as of Oct. 23, 2025.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.

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