You can convert a Traditional IRA to a Roth IRA tax-free only if the money you’re converting has already been taxed. That means isolating your after-tax contributions (your “basis”) by first moving all pre-tax IRA money into an employer retirement plan, then converting what remains. Done in that order, the conversion produces zero taxable income. Skip the first step and the IRS pro-rata rule will tax most of what you convert, no matter how you label the dollars leaving the account.
What Actually Gets Taxed When You Convert
A Traditional IRA holds two kinds of money. Pre-tax money includes any deductible contributions you claimed over the years plus all investment earnings. Basis is the non-deductible contributions you made with after-tax dollars and never deducted. Converting pre-tax money triggers ordinary income tax because it has never been taxed. Converting basis does not, because you already paid tax on those dollars.1Internal Revenue Service. Traditional IRAs
You are responsible for tracking basis across your entire lifetime of IRA contributions. The tool is IRS Form 8606, filed with your return any year you make non-deductible contributions, take distributions from an IRA that contains basis, or do a Roth conversion.2Internal Revenue Service. About Form 8606, Nondeductible IRAs Without a documented Form 8606 trail, you have no proof that any of your contributions were non-deductible, and the IRS can treat the entire conversion as taxable.
Why You Can’t Just Convert the After-Tax Portion
The instinct is intuitive: if your Traditional IRA holds $10,000 of non-deductible contributions and $90,000 of pre-tax money, pull out the $10,000 and convert only that. The IRS does not allow it. The pro-rata rule in IRC Section 408(d)(2) requires every distribution or conversion to come proportionally from both your pre-tax and after-tax balances.3Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts You can’t cherry-pick which dollars leave.
The aggregation rule makes it harder. All of your non-Roth IRAs—Traditional, SEP, and SIMPLE—are treated as one combined IRA for this calculation.3Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts It doesn’t matter if basis sits in one account and pre-tax money sits in three others at different brokerages. They get lumped together.
The formula is simple. Divide total basis across all non-Roth IRAs by the total balance of all those accounts as of December 31 of the conversion year. That ratio is the tax-free percentage of any conversion. In the example above, $10,000 of basis divided by a $100,000 total is 10%. Convert $10,000 and only $1,000 comes out tax-free; $9,000 gets added to your taxable income even though you meant to convert only basis. Form 8606 walks through this calculation.2Internal Revenue Service. About Form 8606, Nondeductible IRAs
Step 1: Move Pre-Tax Money Into an Employer Plan
As long as pre-tax dollars remain in any aggregated IRA, the pro-rata rule will tax most of your conversion. The way out is a “reverse rollover”: send the pre-tax portion of your Traditional IRA into an employer-sponsored plan like a 401(k), 403(b), or governmental 457(b).
A special provision in IRC Section 408(d)(3)(H) makes this work. When you roll IRA money into an employer plan, the rolled amount is treated as coming from pre-tax money first, up to your total pre-tax balance across all IRAs.3Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts That overrides the normal pro-rata allocation and is exactly what lets you separate pre-tax funds from basis.
Two conditions have to line up before you can do this. You need to be an active participant in an employer plan, and that plan has to accept incoming IRA rollovers. Not every plan does, so confirm with the plan administrator. Also have the transfer done directly from IRA custodian to plan trustee. An indirect rollover, where the check comes to you first, can trigger mandatory 20% withholding and other complications.
Once the pre-tax funds are in the employer plan, what remains in the Traditional IRA is your documented basis. Now the pro-rata calculation works in your favor: basis is 100% of the IRA balance, so 100% of the conversion is tax-free.
Timing and the December 31 Balance
The pro-rata formula uses your total non-Roth IRA balance on December 31 of the conversion year, not the balance on the day you convert. What matters is that the pre-tax money is out of the IRA system by year-end. Completing the reverse rollover before the conversion is still the safer sequence: it removes ambiguity and gives you time to confirm the employer plan received the funds before you pull the trigger on the Roth side.
Step 2: Convert the Remaining Basis
With pre-tax balances moved out, instruct your IRA custodian to convert the remaining basis directly to a Roth IRA. A direct trustee-to-trustee conversion avoids withholding headaches. If you don’t already have a Roth IRA, open one at this stage.
Your custodian will issue a Form 1099-R reporting the conversion as a distribution, with the full amount in Box 1. This is normal and does not mean you owe tax. The 1099-R is informational; custodians often check “Taxable amount not determined” in Box 2b because they don’t track your basis for you.4Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498 The reverse rollover generates its own 1099-R, typically coded G, showing $0 taxable in Box 2a. Check that coding when the form arrives; an error can trigger an IRS notice.
Report It Correctly on Form 8606
What actually determines the tax result is Form 8606. Complete Part I and Part II for the conversion year, reporting your total non-deductible contributions and the year-end value of all non-Roth IRAs. Because the pre-tax money is gone, the year-end balance equals your basis, and the calculation produces zero taxable income on the conversion.5Internal Revenue Service. Instructions for Form 8606 This form is the legal record proving the conversion was non-taxable.
The penalties for missing the form are small on their face: $50 for a missed filing and $100 for overstating non-deductible contributions, both waivable for reasonable cause.6Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs The real damage is losing your paper trail. Without prior-year Form 8606s establishing basis, the IRS can treat your entire IRA as pre-tax, and your “tax-free” conversion becomes fully taxable. Keep every Form 8606 you’ve ever filed. If you made non-deductible contributions in past years without filing the form, file late Form 8606s to build the record before you convert.
When This Strategy Doesn’t Work
The reverse rollover only works if you have an employer plan that accepts incoming IRA rollovers. Self-employed without a solo 401(k), retired without an employer plan, or working under a plan that refuses IRA rollovers—any of those and the pre-tax money has nowhere to go. Any conversion will be partially taxable under pro-rata. Some people in that situation convert over several years to spread the tax across lower brackets.
A SIMPLE IRA adds a timing trap. During the first two years after you begin participating in a SIMPLE IRA plan, you can only transfer those funds to another SIMPLE IRA. Moving SIMPLE IRA money to a Traditional IRA, an employer plan, or a Roth IRA inside that window triggers both income tax and a 25% early distribution penalty, steeper than the usual 10%.7Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules Wait out the two years before folding a SIMPLE balance into any conversion plan.
Inherited IRAs are largely off-limits too. A surviving spouse can roll an inherited Traditional IRA into their own IRA and use this strategy. A non-spouse beneficiary cannot roll an inherited Traditional IRA into their own IRA or convert it to a Roth, and is generally required to distribute the account within ten years of the original owner’s death.8Internal Revenue Service. Retirement Topics – Beneficiary
One boundary on the back end: each Roth conversion starts its own five-year holding period from January 1 of the conversion year, and earnings that accumulate inside the Roth follow separate rules.9Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs If the conversion itself produced zero taxable income, there’s no taxable portion for the 10% early withdrawal penalty to apply to on the converted basis. Post-conversion earnings are a separate question.
Doing It Every Year
For 2026, you can contribute up to $7,500 to a Traditional IRA, or $8,600 if you’re 50 or older.10Internal Revenue Service. IRA Contribution Limits High earners covered by a workplace retirement plan lose the Traditional IRA deduction once income exceeds $91,000 (single) or $149,000 (married filing jointly) for 2026, so their contributions become non-deductible by default.11Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500 That’s exactly the kind of basis that can be converted tax-free.
There is also no income limit on Roth conversions themselves.12Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Many high-income earners repeat the cycle every year: contribute the maximum to a non-deductible Traditional IRA, then convert to a Roth shortly after. Converting quickly, before the contribution generates meaningful earnings, keeps the taxable portion at or near zero. Any gains that accumulate between the contribution and the conversion become taxable at conversion, so tight timing between the two steps matters.13Internal Revenue Service. Roth IRAs