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How Much Do You Pay in Roth Conversion Taxes?


Roth conversions are treated like ordinary income and taxpayers have to include the balance on their tax returns. How much you have to pay in taxes depends upon the amount of the conversion plus your adjusted gross income. Here’s what you need to know. A financial advisor could help you put a tax plan together for your retirement investments and goals.

What Is a Roth IRA?

A Roth IRA is a retirement account that is funded with after-tax money, meaning that you have already paid taxes on it. So when you make a withdrawal, you don’t have to pay taxes on that money as long as you follow the rules.

A Roth IRA must be vested before you can make withdrawals. You have to wait five tax years after your first IRA contribution to take money out. Your contributions are assumed to have occurred on January 1 of the tax year in which you start to make contributions. You cannot make withdrawals until after December 31 of the tax year that signifies the fifth year of contributions. However, you do not have to take the required minimum distributions. You can grow the money in a Roth IRA tax-free with a few exceptions.

If you open a traditional IRA instead, you fund it with pre-tax dollars, and it serves as a tax write-off in the year you make contributions. When you retire and start to make withdrawals, you pay income taxes on the withdrawals, and you are subject to required minimum distributions.

What Is a Roth IRA Conversion and How Is It Taxed?

A Roth IRA conversion happens when you convert your traditional IRA to a Roth IRA or when you convert a portion of your 401(k) to a Roth IRA located within your retirement plan.

You are taxed on whatever amount of money you convert each tax year at your ordinary tax rate, not at the lower and preferred capital gains rate. The tax bill you will face could be significant and should be paid with non-retirement account funds to receive the full benefit of making the conversion.

Unless you are 59 1/2 years of age or older, you will also have to pay a 10% penalty for early withdrawal.

Roth Conversion Taxation

SmartAsset: How Much Do You Pay in Roth Conversion Taxes?

If you convert a traditional IRA to a Roth IRA, or do a Roth in-plan conversion, you have to pay taxes on the amount of deductible, pre-tax income that you convert. Traditional IRAs are funded with pre-tax income. If you do a Roth in-plan conversion, you may also be converting some pre-tax funds. A good rule to follow is that you have to pay income taxes on any pre-tax funds that you convert to a Roth IRA. Your tax rate is the marginal tax rate on the amount of your income including the amount of the conversion.

If there are any non-deductible funds in your traditional IRA or 401(k), they may have a nontaxable portion. You will calculate the nontaxable portion on IRS Form 8606.

Let’s say you decide to convert $50,000 from your traditional IRA into a Roth IRA and the entire amount was deductible. If you are in the 22% tax bracket, that means you will pay $11,000 (0.22 x $50,000) in taxes when you convert the $50,000 to a Roth IRA. If the $50,000 amount pushes you into a higher tax bracket when it gets added to your adjusted gross income at the end of the year, then you calculate your tax liability by using the marginal tax rate for your higher tax bracket.

If you are scheduled to take a required minimum distribution (RMD) on the retirement account from which you are making the conversion, you have to take that RMD before the conversion or you will face penalties.

Paying Your Taxes on a Roth Conversion

SmartAsset: How Much Do You Pay in Roth Conversion Taxes?

You will have an opportunity to pay taxes on the proceeds of your Roth conversion at the time of your conversion. It’s best to have a tax accountant or financial advisor provide advice and assistance if you are going to make a Roth conversion. You may have to pay taxes on the conversion either at the time of conversion or as estimated tax payments during the tax year of the conversion. It is not wise to wait until the tax deadline for the year to pay the taxes because you may incur penalties. A tax accountant or financial advisor can best direct you.

Bottom Line

A Roth conversion can benefit you in retirement when you will have more after-tax income available. To take full advantage of the increase in your after-tax retirement income, you have to follow the rules. A tax accountant or financial advisor can guide you through these.

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