How Much Can You Convert to a Roth IRA?
Converting to a Roth IRA has no income or dollar limits. Learn how your existing accounts and tax situation define your ideal conversion amount.
Legally, there are no income restrictions or specific dollar limits imposed by the IRS on the amount you can convert to a Roth IRA in a single year. This means you can convert as much of your eligible retirement funds as you wish.
The practical limit on a Roth conversion is determined by your financial situation. The converted amount, with some exceptions, is treated as ordinary income for the tax year in which the conversion occurs. This means the ceiling on your conversion amount is determined by your ability and willingness to pay the resulting income tax. A substantial conversion can push you into a higher tax bracket, increasing the cost of the transaction.
Determining Your Conversion Eligibility and Amount
Anyone with funds in a qualifying pre-tax retirement account is eligible to execute a Roth IRA conversion. This includes assets held in accounts such as:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k)s
- 403(b)s
- Governmental 457(b) plans
You can choose to convert the entire balance of an account or only a partial amount, which offers flexibility in managing the tax impact.
A restriction on the amount you can convert relates to Required Minimum Distributions (RMDs). If you are required to take RMDs from your traditional retirement accounts, you must satisfy this obligation for the year before any funds can be converted. The RMD amount itself is ineligible for conversion. The total aggregated RMD from all of your IRAs must be withdrawn before you can convert funds from any single IRA.
Calculating the Taxable Portion of a Conversion
When you convert assets from a pre-tax account like a Traditional IRA, the converted amount is generally added to your ordinary income for that year and taxed at your marginal tax rate. If all the money in your traditional IRAs is from pre-tax contributions and earnings, the entire conversion amount is taxable.
The calculation is more complex if you have made both pre-tax and after-tax (nondeductible) contributions to any of your traditional IRAs. The IRS applies the pro-rata rule to determine the taxable portion of your conversion, preventing you from selectively converting only after-tax funds. For this calculation, the IRS treats all of your Traditional, SEP, and SIMPLE IRAs as a single, aggregated account.
To apply the pro-rata rule, you must determine the ratio of after-tax money to the total value of all your aggregated IRAs. This is done by dividing your total after-tax contributions by the total balance of all your non-Roth IRAs at year-end. This percentage represents the non-taxable portion of any conversion during that year.
For example, assume you have $50,000 in after-tax contributions and the total value of all your traditional, SEP, and SIMPLE IRAs is $200,000 at year-end. Your non-taxable percentage is 25% ($50,000 / $200,000). If you convert $40,000 to a Roth IRA that year, 25% of that amount ($10,000) is tax-free. The remaining 75% ($30,000) is taxable as ordinary income.
Information and Forms for Reporting the Conversion
You must report a Roth IRA conversion to the IRS using Form 8606, Nondeductible IRAs. This form is used to report the conversion and calculate the taxable amount, especially when the pro-rata rule applies. It also serves as the record of your basis in nondeductible contributions and tracks how that basis is applied.
To complete Form 8606, you will need several pieces of financial information. This includes the total amount of any new nondeductible contributions for the tax year, the total value of all your traditional, SEP, and SIMPLE IRAs as of December 31, and the gross amount of the funds you converted.
Your financial institution will issue Form 1099-R to report the distribution from your traditional account. This form shows the gross distribution amount and includes a code indicating the transaction was a conversion. The information from Form 1099-R is used on your Form 1040 tax return, along with Form 8606, to determine the final taxable income.
Post-Conversion Rules and Considerations
Once funds are in a Roth IRA, they are subject to rules governing withdrawals that help avoid taxes and penalties. The primary regulations are the 5-year rules, which apply differently to withdrawals of earnings versus withdrawals of converted principal.
One 5-year rule determines when earnings can be withdrawn tax-free. For a withdrawal of earnings to be qualified (tax-free and penalty-free), the first contribution to any of your Roth IRAs must have been made at least five years prior, and you must be over age 59.5. This clock starts on January 1 of the tax year of your first contribution to any Roth IRA.
A separate 5-year rule applies to converted amounts to determine if the 10% early withdrawal penalty applies. If you are under age 59.5 and withdraw converted principal before its 5-year holding period ends, that portion of the withdrawal is subject to the penalty. Each conversion has its own 5-year clock that begins on January 1 of the year the conversion was made.