Roth Conversions

How it works

A Roth conversion takes money out of a traditional, SEP, or SIMPLE IRA, or an eligible employer retirement plan, and moves it into a Roth IRA. The law treats this as two things happening at once: a distribution from the traditional account, and a rollover contribution to the Roth (Section 408A(d)(3)). The distribution half is what gets taxed, included in gross income for the year the conversion happens, at ordinary rates, exactly as if the money had simply been withdrawn and kept.

That characterization, a rollover rather than a new contribution, is also why there is no annual dollar limit and no income ceiling on how much can be converted. Congress repealed the old $100,000 MAGI ceiling on conversions for tax years after 2009, and nothing has replaced it since; the only real constraint is having the cash on hand to pay the tax on whatever gets converted.

Why converting can lower a lifetime tax bill

Paying tax now on money that would otherwise be taxed later only helps if it changes the rate, not just the timing. Three separate things can make that true.

• Rate arbitrage. Converting enough to fill a chosen bracket in an unusually low-income year, such as an early-retirement year before Social Security starts or a year the business posts a loss, taxes the conversion at a rate lower than the same dollars would face coming out later, whether to the owner or to an heir.
• Tax-free growth afterward. Once inside the Roth, further growth is never taxed again as long as the eventual distribution is qualified (Section 408A(d)(2)).
• No required minimum distributions. A Roth IRA carries no RMDs for the original owner, so converting shrinks the taxable income that future RMDs would otherwise stack on top of, including how much of Social Security becomes taxable and whether a Medicare premium surcharge gets triggered.

None of this carries a scheduled expiration to plan around, either. The 2025 federal law known as OBBBA made the current rate schedule permanent instead of letting it revert to higher pre-2018 rates, so filling a bracket today is a stable target rather than a bet against an approaching increase.

What this is worth in Florida

Florida does not tax individual income (Fla. Const. art. VII), so a Florida resident converting an IRA pays no state tax on the conversion, before or after. The entire cost of converting is the federal bracket math above. That is a real advantage over running the same conversion as a resident of a state that taxes ordinary income, but I would rather be precise about what it is: a federal strategy operating on a state with one fewer moving part, not a Florida-specific maneuver in its own right.

Who this applies to

Eligibility to convert is wide open. Where I actually spend judgment is whether converting is a good idea this year.

• Who can convert. Anyone holding a traditional IRA, a SEP IRA, a SIMPLE IRA, or an eligible employer plan balance. There is no income ceiling and no requirement to have earned income, unlike a direct Roth contribution. A SIMPLE IRA carries its own waiting period: it cannot be converted during the first two years of participation, and a distribution attempted before that is not an eligible rollover at all and carries a 25 percent penalty rather than the ordinary 10 percent.
• Employer plans work too, with one more condition. Converting inside a 401(k) to a Roth 401(k), or rolling a 401(k) balance directly to a Roth IRA, follows the same income-inclusion rule, but only if the plan document allows an in-plan Roth rollover or the money is otherwise eligible to leave.
• A genuine gap year. Early retirement before Social Security or RMDs start, a business loss year, a sabbatical: any year with room left in a bracket that would otherwise go unused, plus cash held outside the IRA to pay the resulting tax. Paying from the converted funds themselves gives back most of the benefit, and under 59½ the withheld portion is its own penalized distribution.

A few fact patterns argue against converting, or at least against converting this year.

• An ACA marketplace subsidy. Relying on the premium tax credit while converting risks losing it. Conversion income raises the modified adjusted gross income that credit is measured against (Section 36B), and a large enough conversion can erase the whole year's credit. See the IRMAA and ACA discussion below.
• Two years out from Medicare. Medicare looks back two years when it sets the income-related premium surcharge, so a conversion at 63 lands squarely in that window at 65.
• A future backdoor Roth. Holding a traditional IRA balance on purpose to keep a future backdoor Roth clean runs into the same aggregated IRA balance a conversion draws from, so converting now can contaminate a backdoor Roth planned for a later year.

What it requires

A conversion cannot be undone, so getting the mechanics right before the transfer matters more here than it does for most elections.

• A trustee-to-trustee transfer or a redesignation, completed by December 31. A conversion is a calendar-year event. There is no grace period running to the filing deadline the way there is for a contribution.
• The pro-rata rule, if any traditional-IRA basis exists anywhere. Section 408(d)(2) treats every traditional, SEP, and SIMPLE IRA a taxpayer owns, at every custodian, as one account. The taxable share of a conversion equals pretax dollars divided by the combined balance across all of them as of December 31, computed on Form 8606; a taxpayer cannot convert only the after-tax slice while a pretax balance sits elsewhere.
• Tax paid from outside the IRA, not withheld from it. Withholding federal tax from the conversion itself is a distribution in its own right, and if the owner is under 59½, it is also a penalized one. The safer path is paying from savings or covering it through fourth-quarter estimates.
• A Form 8606, Part II, filed for every conversion year. That is also where the pro-rata computation gets shown, sourced from the custodian's 1099-R.
• No recharacterization, ever, once it is done. A conversion made in a tax year beginning after December 31, 2017 cannot be reversed back to a traditional IRA. Size it conservatively, because there is no take-back once the transfer happens.

The two five-year clocks

These get confused constantly, and they answer two different questions.

• The first clock is per taxpayer, and it governs earnings. A distribution is qualified, meaning the earnings inside it come out completely tax-free, only once the owner is 59½, disabled, deceased, or using the first-time homebuyer exception, and only once five tax years have passed since their first Roth contribution or conversion of any kind (Section 408A(d)(2)). It starts once and never resets.
• The second clock is per conversion, and it governs a penalty on principal. Even though the income tax on a converted amount is already paid, pulling that principal back out within five years, while still under 59½, triggers the ordinary 10 percent early-distribution tax on it (Section 72(t); Section 408A(d)(3)(F)). Each conversion starts its own five-year period on January 1 of the year it happened (Treas. Reg. sec. 1.408A-6), and the oldest is treated as coming out first (Section 408A(d)(4)).

Shorthand that holds up: the first clock decides whether growth comes out tax-free. The second decides whether converted principal escapes a penalty on the way out early. A taxpayer can satisfy one and fail the other in the same year.

What you need to document

Because a conversion cannot be undone, the record I care about most is the one built before the transfer happens, not the one reconstructed afterward to explain it.

Every traditional, SEP, and SIMPLE IRA balance as of December 31

Pulled from every custodian, not just the one holding the account being converted; it is what the pro-rata fraction is computed from, and what the IRS checks against each custodian's Form 5498.

The date and amount of each conversion, kept indefinitely

Filed Forms 8606 and the 5498s behind them establish both clocks and the basis carried forward. A distribution decades later can still turn on what a conversion looked like at the time.

Proof the transfer was a trustee-to-trustee move or a redesignation

Custodian statements showing how the funds moved and on what date.

Confirmation that no tax was withheld from the converted funds

Or, if withholding did happen, the paperwork showing that withheld amount was reported as its own separate distribution rather than folded into the conversion.

A projection against that year's IRMAA and ACA thresholds, dated before the transfer

Because the conversion cannot be reversed, the projection is only useful before the money moves. One run afterward is just a postmortem.

Where it goes wrong

A plain Roth conversion is not an aggressive or reportable position. It is ordinary and statutorily blessed, and the risk it carries is mechanical: getting the computation wrong, not getting caught doing something improper. That is a real difference from the backdoor version of this maneuver, which draws its own step-transaction scrutiny and which I cover separately.

The real damage zone is what conversion income does to Medicare premiums and ACA subsidies, both of which work as cliffs, not phase-ins. Medicare's income-related monthly adjustment amount looks back two years: once modified adjusted gross income crosses a threshold, just above $109,000 single or $218,000 filing jointly for 2026, measured against 2024 income, the entire premium moves to the next tier, not just the amount over the line. The standard 2026 Part B premium of $202.90 a month can climb as high as $689.90 at the top. The ACA premium tax credit works the same way: crossing 400 percent of the federal poverty line can erase an entire year's credit, reconciled on Form 8962, now that the subsidy that used to soften that cliff expired at the end of 2025. Because the conversion cannot be undone, the time to check either threshold is before executing, not after.

The recurring mistakes look the same on every return I see.

• Ignoring the pro-rata rule. This is the single most common error. Treating a conversion as entirely after-tax while a pretax SEP, SIMPLE, or rollover IRA sits at another custodian produces a taxable amount that is simply wrong, and the IRS matches Form 5498 balances against what gets reported.
• Assuming a recharacterization is available. It has not been, for any conversion, since 2018. There is no fix for an oversized conversion after the fact.
• Missing the overlap between the five-year and 59½ rules. Converted principal pulled out early still owes the 10 percent penalty even though the income tax on it was already paid.
• Withholding tax from the conversion while under 59½. The withheld amount becomes its own taxable, penalized distribution on top of the conversion itself.
• Converting before checking IRMAA or ACA exposure. By the time the premium notice or the credit reconciliation arrives, the conversion that caused it is long since irreversible.

A situation where this comes up

The clean version is a couple who retired in their early sixties, in Florida, with no Social Security or Medicare yet in the picture and a genuinely quiet income year: interest, a small pension, not much else. There is real room below the top of whatever bracket they have decided is worth filling, so they convert enough to use it and pay the tax from savings rather than from the IRA itself, repeating the exercise each gap year to build what amounts to a conversion ladder before required distributions start pushing the same dollars into a higher bracket later.

The version that gives me pause is the one where nobody checked the Medicare or ACA timing first. A conversion sized correctly against the bracket and wrong against the IRMAA lookback still creates a real, ongoing premium increase two years later, and by then none of it can be undone. Sizing the bracket right is only half the job; sizing against every other threshold it can trip is the other half.