Can I Convert an IRA to a Roth IRA? Rules and Process

A Roth IRA conversion is the process of moving funds from a pre-tax retirement account, such as a traditional IRA, into a post-tax Roth IRA. This transaction allows future investment growth and qualified withdrawals to be tax-free.

The conversion is a taxable event, and the amount you convert is added to your ordinary income for that year. This means you must pay income tax on the converted funds at your marginal tax rate. The decision to convert involves a trade-off: paying taxes now for the benefit of tax-free withdrawals later in retirement.

Eligibility for a Roth IRA Conversion

There are no income limitations for a Roth IRA conversion. While the ability to contribute directly to a Roth IRA is phased out for higher-income individuals, anyone with funds in an eligible pre-tax retirement account can convert them, regardless of annual earnings. This makes the conversion strategy accessible to all taxpayers.

Several types of retirement accounts are eligible for conversion, including a traditional IRA, a Simplified Employee Pension (SEP) IRA, and a Savings Incentive Match Plan for Employees (SIMPLE) IRA. Funds from a SIMPLE IRA can only be moved to a Roth IRA after a two-year waiting period has passed from the date the first contribution was made.

You can convert all or just a portion of your eligible retirement assets. There is no limit on the number of conversions you can perform, which allows for strategic tax planning by converting smaller amounts over several years to manage the tax impact. This flexibility allows you to tailor the conversion amount to your specific financial situation and tax outlook.

Calculating the Tax on a Conversion

The amount of money moved from a pre-tax retirement account to a Roth IRA is included in your gross income for the year of the conversion. This converted amount is taxed as ordinary income, subject to the same federal tax brackets that apply to your wages or salary, which in 2025 range from 10% to 37%. For example, if a conversion of $20,000 is added to your income and it all falls within the 22% tax bracket, you would owe an additional $4,400 in federal income tax for that year.

A complication arises if you have made both pre-tax (deductible) and after-tax (nondeductible) contributions to any of your traditional, SEP, or SIMPLE IRAs. In this scenario, you cannot convert only the after-tax money to avoid taxes. The Internal Revenue Service (IRS) requires the use of the “pro-rata rule,” which determines the taxable portion of any distribution or conversion from your IRAs.

The pro-rata rule mandates that for tax purposes, the IRS considers all of your traditional, SEP, and SIMPLE IRAs as one aggregated account. You must calculate the ratio of your after-tax contributions (your basis) to the total value of all your IRAs. This ratio determines what percentage of the converted amount is a tax-free return of basis and what percentage is taxable income.

To illustrate, if you convert $30,000 and have a total of $300,000 across all your IRAs as of December 31 of the conversion year. Within that $300,000, you have made $60,000 in nondeductible, after-tax contributions. Your after-tax basis is 20% of your total IRA value ($60,000 / $300,000). Therefore, only 20% of your $30,000 conversion, or $6,000, is tax-free, and the remaining 80%, or $24,000, is taxable income.

Information and Forms for the Conversion

Before initiating a conversion, you must gather specific financial information for tax reporting. You will need the total value of all your traditional, SEP, and SIMPLE IRAs, determined as of December 31 of the conversion year. This aggregate balance is a necessary component for applying the pro-rata rule if you have after-tax funds.

You will also need the total amount of all nondeductible, or after-tax, contributions you have ever made to your traditional IRAs. This cumulative figure is known as your “basis.” Finally, you must know the exact dollar amount you are converting from your pre-tax account to the Roth IRA.

The primary document for reporting a Roth IRA conversion is Form 8606, Nondeductible IRAs, which is used to calculate the taxable amount of a conversion using the pro-rata calculation. The taxable income from Form 8606 is then transferred to your annual Form 1040 tax return. Your financial institution will also send you Form 1099-R, reporting the distribution, and Form 5498, showing the contribution to your Roth IRA.

The Conversion Process

There are three common methods for moving the funds for a conversion.

• Trustee-to-trustee transfer: Also known as a direct transfer, you instruct the financial institution holding your traditional IRA to move the funds directly to your new or existing Roth IRA at another institution. The money never passes through your hands, which minimizes the risk of error.
• In-house conversion: This process is used when you are converting funds between a traditional IRA and a Roth IRA held at the same financial institution. You simply request that the firm redesignate the assets from the traditional account to the Roth account. This is often the simplest method.
• 60-day rollover: With this method, the financial institution sends you a check for the funds from your traditional IRA. You then have 60 days from the date you receive the funds to deposit them into a Roth IRA. If you fail to complete the deposit within the 60-day window, the entire amount may be treated as a taxable distribution and could be subject to a 10% early withdrawal penalty if you are under age 59½.

Post-Conversion Rules and Reporting

After funds are moved into a Roth IRA, they are subject to specific rules regarding withdrawals. Two separate five-year rules apply to converted funds, and they function independently to govern when you can access different portions of your Roth IRA money without negative tax consequences.

The first rule relates to accessing the converted principal. Each conversion you make has its own five-year waiting period. If you withdraw any converted principal before this clock is complete and you are under age 59½, the withdrawal will be subject to a 10% penalty. This clock begins on January 1 of the year in which the conversion was made. For example, if you convert funds during 2025, the five-year period for that specific conversion began on January 1, 2025.

A separate five-year rule applies to withdrawing investment earnings from your Roth IRA tax-free. This clock starts on January 1 of the first year you ever made any contribution to any Roth IRA, whether by direct contribution or conversion. To take a qualified, tax-free withdrawal of earnings, you must be at least age 59½ and have satisfied this five-year holding period.