A Roth IRA conversion is the process of rolling over funds from a pretax retirement account into a Roth IRA. You don’t have to pay tax on most retirement-account contributions in the year you make them, as the money is later taxed in the year of withdrawal. However, it’s the opposite with a Roth account. These accounts accept only taxed contributions, and withdrawals later are tax-free.
The IRS will collect those deferred taxes at the time you convert funds from a pretax retirement account to a Roth IRA. How much you’ll have to pay depends on your marginal tax rate and some other factors.
- Tax comes due on pretax contributions to retirement accounts when they’re transferred, or converted, from the first account to a Roth IRA.
- The converted amount is taxable at your ordinary income-tax rate, but some extra taxes can apply.
- The tax is due in the tax year you make the conversion.
How Much Tax Will You Pay on a Roth Conversion?
You must report any untaxed money you convert from a pretax retirement account as income in the tax year you withdraw it for conversion. The converted funds will be taxed according to your tax bracket as ordinary income, on top of your other income. As a result, the amount will be taxed at your top or “marginal” tax rate, and it might even push you into a higher tax bracket.
Tax brackets break down like this by filing status for tax year 2022, the return you'll file in 2023:
|Tax Rate||Single||Married Filing Jointly||Heads of Household|
|10%||$0 to $10,275||$0 to $20,550||$0 to $14,650|
|12%||$10,275 to $41,775||$20,550 to $83,550||$14,650 to $55,900|
|22%||$41,775 to $89,075||$83,550 to $178,150||$55,900 to $89,050|
|24%||$89,075 to $170,050||$178,150 to $340,100||$89,050 to $170,050|
|32%||$170,050 to $215,950||$340,100 to $431,900||$170,050 to $215,950|
|35%||$215,950 to $539,900||$431,900 to $647,850||$215,950 to $539,900|
|37%||$539,900 or more||$647,850 or more||$539,900 or more|
You might additionally incur the 3.8% net investment income tax, depending on how high the conversion pushes your taxable income. This tax has been in effect since 2013 and it applies to either the total of your investment income or your modified adjusted gross income (MAGI) over certain thresholds, whichever is less.
The MAGI threshold is $250,000 as of 2022 for married taxpayers filing jointly. It drops to $200,000 for single filers or heads of household, and to $125,000 for married taxpayers who file separate returns.
You only have 60 days to complete your conversion, beginning with the date you withdraw the funds from the first retirement account. You also could be charged with a penalty tax of 10% of the withdrawal amount if you miss the deadline and you're younger than age 59½.
The 60-day deadline doesn’t apply if you make the conversion through a trustee-to-trustee or same-trustee transfer.
A Taxation Example
Let’s assume you convert $50,000 from your traditional IRA to a Roth IRA in 2022. You’re single and your taxable income for the year is $150,000. Therefore, your top marginal tax bracket before you make the conversion would be 24%.
Now you must add that pretax $50,000 conversion to your taxable income. This increases your income to $200,000, pushing you into the next-highest tax bracket of 32%. You would therefore pay $16,000 in tax on that converted $50,000, in addition to tax on your other income—32% of $50,000.
This example presumes you avoid the 10% penalty tax and/or the net investment income tax.
How To Pay Taxes on a Roth Conversion
Converting to a Roth IRA requires filing Form 8606, “Nondeductible IRAs,” with your Form 1040 tax return. You would report the taxable amount of your conversion on this form, then transfer it to your tax return. You should receive a Form 1099-R from your financial institution after the end of the year, reporting the amount of the conversion. The IRS receives a copy of this form as well.
You can elect to have taxes withheld from the converted amount if you don't want to have to deal with this when you file your return. You would still have to report the event on Form 8606, but you would also report the amount of taxes that were already withheld and paid so you don’t have to deal with a higher tax bill at the time you file.
You can make estimated tax payments in advance throughout the year to cover the tax on the additional income.
Is a Roth Conversion Worth the Tax Cost?
Roth IRAs have some significant tax advantages that other types of retirement accounts don't share, but will the tax bill be worth it?
Keep in mind the converted amount is going to be taxed eventually. The IRS will either take its share at the time you convert or when you take withdrawals in retirement. Your answer can come down to what you expect your tax situation to be like at the time you retire.
Doing a conversion and paying the tax now can make sense if you’re having an “off” year financially. Maybe you’re in a 22% tax bracket in 2022, but you expect your income to rebound into the 24% bracket in your retirement years. Why pay an extra two percentage points on that money later by simply leaving it in the initial account, especially given that earnings on that money become tax-free after it’s been converted to your Roth account?
Frequently Asked Questions (FAQs)
How do I avoid taxes on a Roth IRA conversion?
You’ll almost certainly pay taxes on a Roth conversion. The question is when that money will be taxed. Doing the conversion in a year when you’re eligible for several tax deductions or tax credits would help offset the taxes due on the conversion because the converted amount is considered to be ordinary income. You’ll also want to avoid the 10% penalty tax for missing the deadline for the conversion.
When are taxes due on a Roth conversion?
Taxes are due in the year you make the conversion, but the money won’t be taxed again at the time you withdraw it in retirement, as it would be with a traditional IRA. And any earnings on that money after the conversion date can be tax-free as well after five years.
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Congressional Research Service. “Traditional and Roth Individual Retirement
Accounts (IRAs): A Primer,” Page 2.
Fidelity. “Roth IRA Conversions and Taxes.”
Tax Foundation. “2022 Tax Brackets.”
IRS. “IRA FAQs.”