How Often Can You Do a Roth Conversion?

A Roth conversion moves funds from a pre-tax retirement account, like a Traditional IRA or a former employer’s 401(k), into a Roth IRA. This process involves paying income tax on the converted amount at your current rate. In exchange, the money can grow and be withdrawn in retirement completely tax-free, which is the primary appeal of the strategy.

The Frequency of Roth Conversions

The Internal Revenue Service (IRS) does not limit how many Roth conversions you can perform or the total dollar amount you can convert. You are free to execute conversions as often as your financial institution allows, whether that is annually, quarterly, or more frequently. This flexibility allows for strategic tax planning, as you are not required to convert a large sum in a single transaction.

Many people perform multiple, smaller conversions over several years, a strategy known as tax bracket management. By converting smaller amounts annually, you can better control your taxable income and avoid being pushed into a higher tax bracket. A large conversion could increase your adjusted gross income (AGI), impacting your eligibility for tax credits and deductions. For example, you might convert just enough from a Traditional IRA each year to fill your current tax bracket, an approach also used in the “Roth conversion ladder” strategy for early retirees.

Tax Implications of Each Conversion

When you convert funds from a pre-tax retirement account to a Roth IRA, the converted amount is included in your taxable income for that year. This amount is taxed as ordinary income at your marginal tax rate, not as capital gains. The conversion is not subject to the 10% early withdrawal penalty, even if you are under age 59.5, provided the funds are moved in a direct trustee-to-trustee transfer.

The pro-rata rule applies if you hold both pre-tax and after-tax (nondeductible) funds in any of your Traditional, SEP, or SIMPLE IRAs. The IRS requires you to aggregate all such IRAs to determine the taxable portion of a conversion. You cannot choose to convert only the after-tax dollars; any conversion will consist of a proportional mix of your pre-tax and after-tax funds.

To illustrate, imagine you have a total of $100,000 in all your Traditional IRAs combined. Of this total, $80,000 consists of pre-tax contributions and earnings, and $20,000 is from after-tax, nondeductible contributions. According to the pro-rata rule, 80% of your total IRA balance is pre-tax and 20% is after-tax. Therefore, if you decide to convert $30,000 to a Roth IRA, 80% of that conversion ($24,000) would be taxable income, and 20% ($6,000) would be a tax-free return of your after-tax basis.

The Five-Year Rule on Converted Amounts

After a Roth conversion, two distinct five-year rules apply. The first rule pertains to the tax-free status of earnings. For investment earnings on the converted amount to be withdrawn tax-free, the Roth IRA must have been established for at least five years and you must be over age 59.5. This five-year clock starts on January 1 of the tax year of your very first contribution to any Roth IRA.

The second five-year rule is separate and applies to avoiding a 10% early withdrawal penalty on the converted principal. Each conversion transaction has its own unique five-year holding period. If you withdraw any part of the converted principal before this five-year period has passed and you are under age 59.5, that portion is subject to a 10% penalty. This rule is particularly relevant for those using a Roth conversion ladder for early retirement income.

For example, if you convert funds in 2024, the five-year clock for that specific amount starts on January 1, 2024, and ends on January 1, 2029. If you perform another conversion in 2025, a new five-year clock begins for that amount. After you reach age 59.5, you can withdraw converted principal penalty-free at any time, though the rule on earnings still applies.

Reporting Conversions on Your Tax Return

Every Roth conversion must be reported to the IRS on your annual income tax return using Form 8606, Nondeductible IRAs. This form is required for any year you complete a conversion, and failure to file it can result in penalties.

The purpose of Form 8606 is to calculate the taxable amount of your conversion, which is then carried over to your Form 1040 and included in your ordinary income. This calculation is especially important when the pro-rata rule applies, as the form walks you through the steps to determine the proportional mix of pre-tax and after-tax funds.

Second, Form 8606 serves to track your basis in nondeductible IRA contributions. The form maintains a running total of this basis, ensuring that you do not pay tax on the same money twice. To complete the form, you will need information such as the total value of all your Traditional, SEP, and SIMPLE IRAs as of December 31, the amount you converted, and your existing basis from prior years.