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Roth IRA Conversions and Taxes

If you're thinking about converting a Traditional IRA to a Roth IRA, it can be a smart move—but it does have potential income tax implications.

It's important to understand that converting from a Traditional IRA is a taxable event. It can be part of a successful strategy if you have the funds available outside of your retirement accounts to pay the taxes and one or more of the following apply:

  • You expect to be in a higher tax bracket in retirement than you are now.
  • You think the value of your IRA investments is hitting a low point.
  • You have other losses or deductions to offset the tax due on conversion.
  • You don’t need to take distributions by age 70½.
  • You are moving to a state with higher income taxes.

These are the most common considerations for most customers when converting to a Roth IRA, but more nuanced and complex situations may arise; consult your tax advisor for more information.

Note: If you have a 401(k) from a former employer and are interested in the advantages offered by Roth IRAs, you can convert your 401(k) into a Roth IRA directly. However, similar to converting assets from a Traditional IRA, you'll owe taxes on the amount of pretax assets you convert.1

How conversions are taxed

Roth conversions and MRDs

If you are 70½ or older and must take minimum required distributions (MRDs) from your Traditional IRA, bear in mind that you must take any MRDs that are due before the conversion and failing to do so may result in penalties. MRD amounts cannot be included in the converted amount.

The amount you choose to convert will be taxed as ordinary income. This additional income, therefore, can push you into a higher marginal federal income tax bracket.

The total taxable amount is affected by whether the underlying contributions to the IRA were deductible. Deductible contributions and any gains on them are taxed at their full current value—so if your Traditional IRA has only deductible contributions, you’ll pay tax on the full amount. Nondeductible contributions have a nontaxable portion, which you’ll calculate using cost basis on IRS Form 8606.

Ways to pay the tax

The federal tax on a Roth IRA conversion will be collected by the IRS with the rest of your income taxes due on the return you file in the year of the conversion. The ordinary income generated by a Roth IRA conversion generally can be offset by losses and deductions reported on the same tax return.

It's usually considered a good idea to avoid using the funds that are being converted from within your Roth to pay the tax on a conversion. By doing so, you will have less left in the account to potentially grow tax-free and, if you are under 59½, you'll also incur the 10% penalty on the amount you don't convert to the Roth IRA.

You may be required to make estimated tax payments in the year of the conversion, before you do your return.

Reporting conversions on your return

Fidelity reports any Roth IRA conversion amounts as distributions on Form 1099-R and contributions to the Roth IRA(s) for the tax year on Form 5498.

For help with the 1099-R and 5498, see Form 1099-R guide for retirement distributions and Form 5498 guide for IRA contributions. You may also review the IRS Form 1040 instructions or consult with your tax advisor.

Converting back or recharacterizing

If you change your mind about a Roth IRA conversion, you generally have until October 15 of the following year to undo the conversion without penalty.

Additional resources

Tax-Advantaged Fidelity Solutions
Find Fidelity products that can help you manage the potential impact of taxes on your saving and investing.

More information

  • irs.gov

    For details on conversion and other tax issues related to IRAs, see IRS Publication 590.

  • Converting to a Roth IRA

    Get an understanding of the basics of conversion, including when and why it makes sense for many investors.

  • Roth IRA Conversion Checklists

    Convert your Traditional IRA to a Fidelity Roth IRA in just a few easy steps.

1. Consider all applicable fees and features before transferring your retirement assets to Fidelity.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

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