What is a Roth conversion?

A Roth conversion moves money from a pre-tax retirement account (traditional IRA, SEP IRA, SIMPLE IRA, or an eligible workplace plan) into a Roth IRA. The converted amount is treated as ordinary taxable income in the year of the conversion. In exchange, the money then grows tax-free in the Roth IRA, and qualified withdrawals are tax-free.

The core trade

A conversion is a bet on tax rates: pay income tax now at today's rate to avoid paying tax later at withdrawal. It tends to help when the tax rate paid on the conversion is lower than the rate that would apply to future withdrawals — for example, in low-income years between retirement and the start of required minimum distributions (RMDs), or when tax rates are expected to rise.

Key properties

• No income limit. Anyone may convert, regardless of income. (The income limit on conversions was removed in 2010. Income limits still apply to contributions to a Roth IRA — that is a separate rule.)
• No dollar limit. Any amount can be converted in a year. The annual IRA contribution limit does not apply to conversions.
• Irreversible. Since the 2018 tax year, a conversion cannot be undone (recharacterization of conversions was eliminated by the Tax Cuts and Jobs Act). The tax bill is locked in once the conversion executes.
• Taxed as ordinary income. The converted pre-tax amount is added to the year's income and taxed at ordinary federal rates (plus state income tax where applicable). It is not capital-gains income.
• RMDs cannot be converted. For account owners already subject to required minimum distributions, the year's RMD must be withdrawn first and cannot be converted; only amounts above the RMD are eligible.

Backdoor Roth (related concept)

A "backdoor Roth" is a nondeductible traditional IRA contribution followed by a conversion. It uses the conversion mechanism to fund a Roth IRA for people above the Roth contribution income limits. The pro-rata rule determines how much of such a conversion is taxable.