How Roth Conversions are Taxed

Roth IRA conversions are a powerful tax planning strategy that can improve your financial position in retirement. Converting a traditional IRA to a Roth IRA has significant benefits, particularly regarding taxes, Social Security, and Medicare. However, there are important considerations to review before making the switch.

Roth IRAs vs Traditional IRAs

Understanding the difference between Roth IRAs and Traditional IRAs is essential when planning your retirement distributions and evaluating conversion strategies. While both offer tax advantages, the timing of those advantages—and their implications on your long-term finances—are very different.

What Is a Roth IRA?

A Roth IRA is a retirement account funded with after-tax dollars. You don’t get a tax break when you contribute, but qualified withdrawals are tax-free in retirement.

Key Features of a Roth IRA

• Contributions are made with after-tax income (not deductible).
• Earnings grow tax-free.
• Qualified withdrawals after age 59½ are tax-free if the account has been open at least five years.
• No required minimum distributions (RMDs) during the account holder’s lifetime.
• Income limits apply for direct contributions.

A Roth IRA is often ideal for individuals who expect to be in a higher tax bracket in retirement or want to minimize taxable income later in life.

What Is a Traditional IRA?

A Traditional IRA is funded with pre-tax dollars (if eligible), allowing you to potentially lower your taxable income in the year you contribute. However, withdrawals in retirement are fully taxable.

Key Features of a Traditional IRA

• Contributions may be tax-deductible, depending on income and participation in a workplace retirement plan.
• Earnings grow tax-deferred.
• Withdrawals in retirement are taxed as ordinary income.
• Required minimum distributions begin at age 73.
• Early withdrawals (before age 59½) may be subject to a 10% penalty plus income tax.

A Traditional IRA is typically a good fit for those who want to reduce their current tax burden and anticipate being in a lower tax bracket during retirement.

Comparing Tax Features of Roth vs Traditional IRAs

Roth IRA	Traditional IRA
Tax Features
Earnings: Grow tax-free	Earnings: Grow tax-deferred
Contributions: Made with after-tax dollars (not deductible)	Contributions: Made with pre-tax dollars (deductible if income-qualified)
RMDs: Not required during the account holder’s lifetime	RMDs: Required starting at age 73
Withdrawals: Tax- and penalty-free withdrawals of contributions anytime. Earnings are tax-free if IRS-qualified.	Withdrawals: Taxable. Early withdrawals may incur penalties.
Income Requirements
Eligibility: Must have earned income and fall within IRS income limits 2023 phase-out: – Less than $153,000 (single) – Less than $228,000 (married filing jointly)	Eligibility: No income limits to contribute. For deduction eligibility, must meet IRS income limits.

How Does a Roth Conversion Work?

A Roth IRA conversion involves transferring funds from a traditional IRA (or another eligible retirement account) into a Roth IRA. When you convert, you pay income tax on the amount transferred, but once in the Roth IRA, your money grows tax-free—and qualified withdrawals in retirement won’t be taxed.

This strategy allows you to pay taxes now in exchange for tax-free income later, which can be especially valuable if you expect your tax rate to rise in the future.

Key Features of Converting to a Roth IRA Account

Roth conversions can be a smart planning tool, particularly for those in lower tax years or preparing for retirement with future tax free growth mind.

Here are the key features of Roth conversions you should be aware of:

• The converted amount is taxed as ordinary income in the year of conversion.
• No penalties apply regardless of your age (though taxes still apply).
• Future growth and qualified withdrawals from the Roth IRA are tax-free.
• Conversions can reduce future required minimum distributions (RMDs).
• There are no income limits for making a Roth conversion.

How Are Roth Conversions Taxed?

Roth conversions are taxed as ordinary income. For example, if you convert $40,000 and your marginal tax rate is 22%, you’ll owe $8,800 in federal income taxes (not including potential state income taxes).

Key Roth Conversion Tax Rules

How Much Tax Will I Pay If I Convert My IRA to a Roth?

If you’re considering converting your traditional IRA account to a Roth IRA, the amount of tax you’ll owe on the conversion depends on several factors, including the current tax rate. Let’s walk through how to estimate your tax liability and explore strategies to minimize the impact.

Estimating Taxes on Your Roth Conversion

The tax you pay on a Roth IRA conversion is based on the dollar amount of the converted funds and your tax bracket. For example, if you convert $50,000 from a traditional IRA to a Roth IRA, and you fall into the 24% tax bracket, your tax liability for that conversion would be:

The exact amount of tax you owe depends on your specific situation, including your other sources of income for the year.

When Should You Consider a Roth IRA Conversion?

A Roth IRA conversion can be an effective strategy for certain individuals, but it may not be the right choice for everyone. Understanding when converting to a Roth IRA are are beneficial depends on various financial factors.

You’re in a Lower Tax Bracket

If you’re currently in a lower tax bracket, converting funds from a traditional IRA to a Roth IRA can allow you to pay income taxes at a lower rate now rather than in retirement, when you may be in a higher tax bracket. This is especially useful if you anticipate your tax rate will rise in the future.

You Have Years of Low Income

If you’re experiencing a low-income year, it’s a good time to convert. This allows you to convert assets while minimizing the tax impact, as your income will be lower and may keep you in a lower tax bracket.

You Want to Reduce Future RMDs

Roth IRAs do not have RMDs, unlike traditional IRAs, which require you to withdraw money starting at age 72. If you want to avoid RMDs or reduce the size of withdrawals from your retirement accounts in the future, a Roth conversion can help.

You’re Preparing for a Higher Future Tax Rate

If you expect tax rates to rise in the future—whether due to changes in tax laws or an increase in your income—converting some of your traditional IRA funds to a Roth IRA can lock in a lower tax rate now, while potentially saving you money in taxes later.

You Want Tax-Free Growth for Your Beneficiaries

Roth IRAs allow your beneficiaries to inherit the account, withdrawn tax free, which can be a beneficial estate planning tool if you want to pass on your retirement savings without tax liabilities. If leaving a tax-free inheritance is important to you, converting to a Roth IRA may be a smart move.

You’re Looking to Maximize Social Security Benefits

A Roth conversion can help you manage your Modified Adjusted Gross Income (MAGI). By converting to a Roth IRA, you can potentially reduce the tax burden on your Social Security benefits, as Roth conversions do not count as taxable income for Social Security purposes.

Benefits of a Roth IRA Conversion

Roth conversions aren’t just a short-term tax move—they’re a long-term retirement planning strategy. By shifting after-tax money into a Roth IRA, many retirees and pre-retirees are creating more control over future income, reducing tax burdens, and preserving wealth for the next generation.

Tax-Free Withdrawals in Retirement

Once you reach age 59½ and your Roth IRA has been open for at least five years, you can take tax-free withdrawals of both contributions and earnings. This allows you to access funds without triggering a tax hit in retirement—unlike traditional IRA savings, which are taxed as ordinary income.

Because Roth IRAs are funded with after-tax money, they become powerful tools for managing retirement income without increasing your tax liability or Medicare premiums.

No Required Minimum Distributions (RMDs)

One of the biggest advantages of a Roth IRA is that it’s not subject to required minimum distributions during the account holder’s lifetime. With traditional IRAs and 401(k)s, the federal government agency overseeing tax rules (the IRS) requires RMDs starting at age 73, which can push you into a higher tax bracket.

Roth IRAs, on the other hand, let your money continue growing tax free, giving you more flexibility over when—and if—you want to tap into your retirement funds.

Reduce Future Taxable Income

Converting now can reduce the size of your traditional IRA or other tax-deferred retirement accounts, which in turn lowers future RMDs. The strategy of reducing your taxable income can help you stay in a lower tax bracket in retirement, protect your Social Security benefits from unnecessary taxation, and possibly avoid IRMAA surcharges on Medicare premiums.

By planning around your current and expected income levels, Roth conversions give you greater control over your future tax obligations.

Estate Planning Benefits

Roth IRAs are considered tax free assets for beneficiaries, making them highly efficient tools for wealth transfer. While heirs are subject to required withdrawals under the 10-year rule, those distributions are generally income-tax free. This can be especially beneficial if your heirs are in higher tax brackets.

A Roth IRA also reduces the risk that they’ll face steep tax consequences from inherited traditional IRAs or 401(k)s. When included as part of a comprehensive estate plan, a Roth conversion may help reduce long-term investment risks and shield your legacy from unnecessary taxes.

Income and Contribution Limits for Roth IRAs in 2025

While there are no income limits for conversions, Roth IRA contributions have Modified Adjusted Gross Income (MAGI) limits. This means that anyone—regardless of income—can convert funds from a traditional IRA to a Roth IRA, but direct contributions to a Roth IRA are only allowed if your MAGI falls within certain IRS-defined thresholds.

If your MAGI is too high, you may be ineligible to contribute directly, though strategies like a Backdoor Roth IRA may still allow you to fund a Roth account indirectly.

Backdoor Roth Conversion Strategy

If your income is too high for regular Roth contributions, consider a Backdoor Roth IRA. This involves contributing to a traditional IRA (non-deductible) and then converting it to a Roth IRA. A Backdoor Roth IRA is a legal workaround—but be aware of the pro-rata rule if you have other IRA assets. Work with an experienced tax consultant to avoid unexpected tax consequences.

Roth IRA Conversion FAQs

Does a Roth conversion count as income?

Yes, a Roth conversion is considered taxable income in the year it’s made. That means the amount you convert from a traditional IRA to a Roth IRA is added to your ordinary income, which may impact your current income tax bracket, Medicare premiums, and the taxation of your Social Security benefits.

Does Roth IRA affect Social Security?

While a Roth IRA itself does not reduce your Social Security benefits, a conversion can increase your provisional income, which the IRS uses to calculate how much of your Social Security income is taxable.

What is provisional income and what are the provisional income limits for 2025?

Provisional income is the income measure the IRS uses to determine how much of your Social Security benefits are taxable. It equals your adjusted gross income (AGI) + tax-exempt interest + 50% of your Social Security benefits.

2025 Provisional Income Limits

Single filer limits:

Under $25,000: 0% of benefits taxable

$25,000–$34,000: Up to 50% taxable

Above $34,000: Up to 85% taxable

Married filing jointly:

Under $32,000: 0% taxable

$32,000–$44,000: Up to 50% taxable

Above $44,000: Up to 85% taxable

Do Roth IRA distributions affect Medicare premiums?

Yes. Roth conversions increase your Modified Adjusted Gross Income (MAGI), which Medicare uses to assess your premiums. Higher MAGI can trigger IRMAA surcharges on Medicare Part B and D.

Can I reduce my tax bill by doing partial conversions?

Yes, spreading your conversion over several years can help you stay in a lower tax bracket and reduce the overall taxes owed, especially if you have other sources of income.

Will Roth conversions increase my tax bracket?

They can. Large conversions may bump you into a higher tax bracket, triggering more taxes than expected. This is especially important if you have other taxable income in the same year. Consider spreading your conversion over multiple years. This keeps your total taxable income lower and can prevent IRMAA surcharges on Medicare and reduce taxes on Social Security.

Are Roth IRA conversions taxable?

Yes. The entire converted amount is taxable unless it includes non-deductible contributions.

Does a Roth conversion count as a contribution?

No. A Roth conversion is a transfer, not a contribution, so it does not affect your annual contribution limits.

Does Social Security count as income for Roth IRA contributions?

No. Social Security is not considered earned income, so you can’t use it to contribute to a Roth IRA unless you have other earned income.

Do I get a tax deduction when I convert to a Roth IRA?

No, Roth IRA conversions are not tax-deductible. You must pay income taxes on the amount converted in the year of the conversion.

Should I set up tax withholding for a Roth conversion?

Yes, you can choose to have taxes withheld during the conversion, but doing so may reduce the total amount moved into your Roth. Paying taxes from non-retirement assets is often preferred.

Can I use non-retirement income to pay the taxes on a Roth conversion?

Yes, using non-retirement income or savings to cover the tax bill helps you convert the full amount and maximize future tax-free growth.

Does investment income affect the cost of a Roth conversion?

Yes, investment income adds to your taxable income, which can increase your tax bracket and raise the overall tax owed on a conversion.

Do Roth conversions count as long-term capital gains?

No, Roth conversions are taxed as ordinary income, not as long-term capital gains.

Can I withdraw funds from retirement assets to pay conversion taxes?

You can, but it may not be ideal. Withdrawing funds from retirement accounts may trigger taxes and early withdrawal penalties if you’re under age 59½.

How do Roth conversions interact with other retirement assets?

Roth conversions can reduce the size of your tax-deferred retirement assets, which may help lower future RMDs and taxable income in retirement.

Contact Steward Ingram & Cooper, PLLC Today

At Steward Ingram & Cooper, PLLC, our Raleigh tax professionals and financial advisors help individuals navigate complex retirement tax decisions, including Roth conversions. Whether you’re planning ahead for Medicare premiums or optimizing your Social Security strategy, our tax planning and prep CPAs can guide you with personalized advice based on our years of industry experience.

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