Yes, a Roth conversion does count as taxable income. When you move money from a Traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA, any dollar that was never previously taxed is added to your gross income for the year the conversion is completed and taxed at your ordinary income rates. How much of the conversion actually hits your return depends on whether your original contributions were deductible, plus how much the account has grown.
What Part of the Conversion Is Taxable
The principle behind the math is simple. Money that has already been taxed will not be taxed again. Money that has never been taxed will be taxed on its way into the Roth. That splits the converted amount into two buckets.
Pre-tax money is the first bucket. It covers every contribution you deducted on a past return, plus all the investment growth inside the account. None of it has ever been through federal income tax, and the full amount becomes taxable ordinary income when you convert.1Internal Revenue Service. Topic No. 309, Roth IRA Contributions
After-tax money, or “basis,” is the second bucket. If you made nondeductible contributions to a Traditional IRA, you already paid tax on those dollars in the year you put them in. That basis passes into the Roth tax-free. Convert $50,000 where $10,000 is documented nondeductible basis, and only $40,000 counts as income.
Investment earnings always fall into the taxable bucket, whether the original contribution was deductible or not. Every dollar of dividends, interest, and appreciation is treated as pre-tax. This is why the tax cost of a conversion is smaller when an account balance is temporarily low: less growth means less taxable income.
The Pro-Rata Rule When You Have Mixed IRA Money
If your Traditional IRA holds both pre-tax and after-tax money, you cannot convert just the basis and leave the pre-tax dollars alone. The IRS treats every dollar leaving any non-Roth IRA as a proportional mix. This is the pro-rata rule, and it surprises a lot of people.
The calculation aggregates all of your Traditional, SEP, and SIMPLE IRA balances as if they were one account. Balances in employer plans like 401(k)s are not included.2Internal Revenue Service. Instructions for Form 8606 The formula:
(Total nondeductible basis across all non-Roth IRAs) ÷ (Total fair market value of all non-Roth IRAs on December 31 of the conversion year) = Non-taxable percentage
Multiply that percentage by the amount you converted. The result is the tax-free portion. Everything else is ordinary income. Say you hold $100,000 across all non-Roth IRAs, and $20,000 is documented basis. Your basis percentage is 20%. Convert $30,000, and $6,000 comes across tax-free while $24,000 is taxable.
Two details catch people. The December 31 balance is what matters, not the balance on the day you converted, so a contribution or rollover into a Traditional IRA later in the year changes the ratio retroactively. And every non-Roth IRA you own is in the pool, including accounts at other custodians you never planned to touch.
Reporting the Conversion on Your Return
Three forms carry the transaction from your custodian to the IRS: the 1099-R, Form 8606, and your Form 1040.
Your IRA custodian issues Form 1099-R showing the gross amount of the conversion in Box 1. Box 2a may show the same figure or may be left blank with “Taxable amount not determined” checked, because the custodian has no way to know your basis. Box 7 shows Distribution Code 2 if you are under 59½ or Code 7 if you are 59½ or older, with the IRA/SEP/SIMPLE box checked.3Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
The gross amount from Box 1 goes on the IRA distributions line of Form 1040. Form 8606 then calculates what part is actually taxable after subtracting your basis, and that figure goes on the taxable amount line.4Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Part I of Form 8606 establishes your cumulative basis; Part II runs the pro-rata calculation on the conversion.2Internal Revenue Service. Instructions for Form 8606
Skip Form 8606 and the IRS assumes the entire distribution is taxable. You will get a notice for the difference, and you lose the documentary trail proving your basis. The statutory penalty for failing to file when required is $50 per occurrence, but the practical cost is paying tax a second time on money you already paid tax on.2Internal Revenue Service. Instructions for Form 8606 Keep every Form 8606, Form 5498, and 1099-R until all IRA distributions are complete.5Internal Revenue Service. About Form 8606, Nondeductible IRAs
Paying the Tax Without Triggering an Underpayment Penalty
The IRS wants tax paid as income is earned, not in a lump sum in April. A large conversion can leave your regular withholding badly short, and that shortfall carries an underpayment penalty.
Two safe harbors avoid the penalty. Pay at least 90% of the current year’s tax through withholding and estimated payments, or pay at least 100% of the prior year’s tax (110% if your prior-year AGI exceeded $150,000, or $75,000 if married filing separately).6Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax For a first large conversion, the prior-year safe harbor is usually the easier target.
Timing matters. If you convert in October or November you have already missed the April, June, and September estimated payment deadlines. Two moves help. First, increase withholding from wages or pension payments before year-end. Federal withholding is treated as paid evenly across the year even when you concentrate it in December, so a late boost can cover the conversion without a quarterly shortfall. Second, if the conversion income was concentrated in one quarter, file Form 2210 with Schedule AI to use the annualized income installment method, which matches the tax to the quarter the income actually landed in.7Internal Revenue Service. Form 2210 – Underpayment of Estimated Tax by Individuals, Estates, and Trusts
Other Costs Triggered by the Higher AGI
Conversion income increases your adjusted gross income, and a higher AGI drags several other numbers with it. The marginal bracket is only part of the picture.
Medicare Premium Surcharges
Medicare bases Part B and Part D premiums on your modified AGI from two years earlier. A large 2024 conversion can raise 2026 premiums. The surcharges (IRMAA) work in tiers with hard cutoffs: for single filers the first threshold is $109,000, for joint filers $218,000. At the top tier ($500,000 single, $750,000 joint), the 2026 Part B surcharge is $487.00 per month per person, with another $91.00 on Part D. Crossing the first threshold alone adds $81.20 to Part B and $14.50 to Part D.8Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles The tiers are step functions, so exceeding a threshold by a dollar triggers the full surcharge for that bracket.
Social Security Benefit Taxation
Conversion income raises the “provisional income” figure used to tax Social Security benefits. For single filers, benefits become partially taxable at $25,000 of provisional income and up to 85% taxable above $34,000. For joint filers the thresholds are $32,000 and $44,000, and they are not indexed for inflation.9Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable A conversion can push a retiree from the 50% band into the 85% band.
Net Investment Income Tax
The 3.8% Net Investment Income Tax applies to the lesser of your net investment income or the amount your MAGI exceeds $200,000 (single) or $250,000 (joint).10Internal Revenue Service. Topic No. 559, Net Investment Income Tax Conversion income is not itself investment income, so the 3.8% does not apply to the converted dollars. But the conversion raises your MAGI, and that can pull your capital gains, dividends, and rental income above the threshold.
Credit and Deduction Phase-Outs
Tax benefits like the Child Tax Credit and the American Opportunity Tax Credit phase out as AGI rises. Medical expenses are deductible only above 7.5% of AGI, so a higher AGI raises that floor.11Internal Revenue Service. Topic No. 502, Medical and Dental Expenses Sizing a conversion to stay under specific thresholds, rather than converting a full balance in one year, often produces a better after-tax result than a single large conversion.
The Five-Year Rule on Withdrawing Converted Money
Paying tax on the conversion does not give you immediate penalty-free access to the converted dollars. Each conversion carries its own five-year clock. Withdraw converted amounts before five years have passed while you are under 59½, and the IRS imposes a 10% early withdrawal penalty on the amount pulled out.12Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
The five-year period starts on January 1 of the year the conversion was completed, regardless of the actual date. A conversion done in November 2026 starts its clock on January 1, 2026, and clears on January 1, 2031. Each year’s conversion has its own independent clock. The penalty does not apply if you are 59½ or older, disabled, or if the distribution goes to a beneficiary after your death. Regular Roth contributions follow different rules and can come out at any time without tax or penalty, because they were made with after-tax dollars.