A traditional IRA to Roth IRA conversion lets you move pre-tax retirement savings into an account where future growth and qualified withdrawals are completely tax free. The trade-off is simple: you pay income tax on the converted amount now, in exchange for tax-free income later. For taxpayers who time their conversion during a low-income year or expect to be in a higher tax bracket in retirement, this strategy can produce significant long-term savings.
Below, we walk through how a Roth conversion works, who benefits most, the key rules you need to know (including the pro-rata rule and the five-year holding period), and how Arizona's flat income tax affects the math.
What Is a Roth IRA Conversion?
A Roth IRA conversion is the process of transferring funds from a traditional IRA (or another eligible retirement account such as a SEP IRA or SIMPLE IRA) into a Roth IRA. Unlike Roth IRA contributions, which are subject to income limits ($153,000 to $168,000 MAGI for single filers, $242,000 to $257,000 for married filing jointly in 2026), there is no income limit on Roth conversions. Anyone can convert regardless of how much they earn. This distinction has been in place since 2010 and was not changed by the One Big Beautiful Bill Act (OBBBA) signed in July 2025.
When you convert, the amount transferred from your traditional IRA is added to your taxable income for that year. You will owe federal income tax (and, in most states, state income tax) on the converted amount. However, once the funds are inside the Roth IRA, all future growth is tax free, and qualified withdrawals in retirement are tax free as well.
When Does a Roth Conversion Make Sense?
A Roth IRA conversion is most advantageous when you can pay taxes on the conversion at a lower rate than you expect to pay in retirement. Common scenarios include:
- A temporary drop in income. Job loss, a career transition, the first year of starting a business, a sabbatical, or an extended medical leave can all push your taxable income well below its normal level. Converting during that year means you pay tax at a lower bracket.
- You expect higher tax rates in the future. Under the OBBBA, the current federal tax brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%) are now permanent. However, your personal income may grow over time, pushing you into a higher bracket in retirement, especially once required minimum distributions (RMDs) begin at age 73.
- You want to eliminate future RMDs. Traditional IRAs require you to begin taking distributions at age 73. Roth IRAs have no required minimum distributions during the owner's lifetime, giving you more control over your retirement cash flow and tax planning.
- You are doing estate planning. Roth IRA assets pass to beneficiaries income-tax free (assuming the original account met the five-year rule). Under the SECURE Act, most non-spouse beneficiaries must empty an inherited IRA within 10 years, but inherited Roth distributions within that window remain tax free.
- You earn too much to contribute directly to a Roth IRA. The Roth IRA contribution income phase-out for 2026 is $153,000 to $168,000 (single) and $242,000 to $257,000 (married filing jointly). High earners who cannot contribute directly may use a conversion (sometimes called a "backdoor Roth") to get money into a Roth.
IRA Contribution Limits for 2025 and 2026
Before converting, it helps to understand the current contribution landscape. The IRS announced the following IRA limits:
- Tax year 2025: $7,000 annual contribution limit ($8,000 if age 50 or older).
- Tax year 2026: $7,500 annual contribution limit ($8,600 if age 50 or older, reflecting the new $1,100 catch-up amount under SECURE 2.0).
These limits apply to total contributions across all of your traditional and Roth IRAs combined. However, conversion amounts are not subject to the annual contribution limit. You can convert any amount in a single year, though the entire converted amount will be included in your taxable income.
The Pro-Rata Rule: Why It Matters
The pro-rata rule under IRC Section 408(d)(2) is the most commonly misunderstood aspect of Roth conversions. If you have both pre-tax and after-tax (nondeductible) balances in your traditional IRAs, you cannot choose to convert only the after-tax portion.
Instead, the IRS treats all of your traditional IRA, SEP IRA, and SIMPLE IRA balances as a single pool. The taxable portion of any conversion is calculated proportionally based on the ratio of pre-tax to after-tax dollars across all of those accounts.
Example: Suppose you have $90,000 in pre-tax traditional IRA funds and $10,000 in nondeductible (after-tax) contributions, for a total of $100,000. If you convert $10,000, the IRS considers 90% of that conversion ($9,000) taxable and only 10% ($1,000) as a tax-free return of your basis, regardless of which specific account you convert from.
One common workaround is to roll pre-tax IRA balances into a current employer's 401(k) plan (if the plan accepts rollovers), which removes those balances from the pro-rata calculation and allows you to convert the remaining after-tax IRA basis with minimal tax.
The Five-Year Rule for Conversions
Roth IRAs have two separate five-year rules, and conversions trigger the second one:
- The contribution five-year rule: Earnings from Roth IRA contributions are tax free and penalty free only if withdrawn after both (a) five tax years from your first Roth contribution and (b) reaching age 59 1/2 (or qualifying for another exception such as disability or death).
- The conversion five-year rule: Each Roth conversion has its own five-year clock. If you withdraw the converted amount before five years have passed and before age 59 1/2, you may owe a 10% early withdrawal penalty on the converted amount, even though you already paid income tax on it at conversion. Once you reach age 59 1/2, this penalty no longer applies regardless of how long ago the conversion occurred.
Because each conversion starts a new five-year clock, taxpayers who plan to access converted funds before age 59 1/2 should convert early enough to satisfy the holding period.
How to Convert: Step by Step
- Evaluate your tax situation. Compare your current effective tax rate to what you expect in retirement. Work with your tax advisor to model the impact of the conversion on your current-year tax liability, including potential effects on Medicare IRMAA premiums (which use a two-year income lookback), health insurance premium subsidies, and financial aid eligibility.
- Check the pro-rata rule. Total up all of your traditional, SEP, and SIMPLE IRA balances to determine how much of the conversion will be taxable.
- Decide how much to convert. You do not have to convert the entire account. Many taxpayers choose partial conversions spread over several years to stay within a target tax bracket.
- Contact your financial institution. The custodian holding your traditional IRA can initiate the conversion. You can convert into a Roth IRA at the same institution or transfer to a different one.
- Set aside money for the tax bill. Pay the conversion taxes from funds outside the IRA if possible. Using IRA funds to pay the tax reduces the amount that benefits from future tax-free growth and may trigger additional penalties if you are under age 59 1/2.
- File Form 8606 with your tax return. This form reports the conversion and tracks your basis in nondeductible IRA contributions.
Federal Tax Brackets in 2026
Under the OBBBA, the Tax Cuts and Jobs Act (TCJA) individual tax rates are now permanent. There is no scheduled rate increase. The 2026 brackets (for single filers) are:
- 10% on income up to $12,150
- 12% on income from $12,151 to $49,475
- 22% on income from $49,476 to $105,700
- 24% on income from $105,701 to $201,775
- 32% on income from $201,776 to $256,225
- 35% on income from $256,226 to $640,600
- 37% on income above $640,600
Knowing where your income falls in these brackets helps you determine the optimal conversion amount. For example, if your taxable income is $40,000 in a low-income year, you could convert up to about $9,475 and stay entirely within the 12% bracket, or convert more and pay 22% on the excess. Compare that to your expected retirement bracket to decide whether the conversion saves money over time. The IRS publishes updated bracket thresholds each fall.
Arizona Tax Considerations
Arizona imposes a flat 2.5% income tax on all taxable income, including Roth conversion amounts. Because the state rate is the same regardless of income level, there is no state-level bracket advantage to converting in a low-income year. However, the 2.5% rate is among the lowest in the country, which makes Arizona a relatively favorable state for executing conversions compared to states with higher or progressive income tax rates.
Arizona does not impose a separate state estate tax, inheritance tax, or gift tax, which further enhances the estate planning value of Roth conversions for Arizona residents. For more on Arizona-specific tax planning strategies, consult with a local tax professional.
Frequently Asked Questions
Is there an income limit on Roth IRA conversions?
No. Since 2010, anyone can convert a traditional IRA to a Roth IRA regardless of income. Income limits only apply to direct Roth IRA contributions.
Can I convert a 401(k) directly to a Roth IRA?
Yes, if you have separated from the employer sponsoring the plan (or if the plan allows in-service distributions). You can roll the 401(k) funds into a Roth IRA, and the taxable portion of the rollover will be included in your income for that year. Some plans also offer an in-plan Roth conversion to a designated Roth account within the same retirement plan.
Can I undo a Roth conversion?
No. Prior to 2018, the tax code allowed "recharacterization" of Roth conversions (essentially reversing them). The TCJA eliminated this option starting in 2018, and the OBBBA did not restore it. Once you convert, the decision is final.
How does a Roth conversion affect my Social Security benefits?
The conversion amount is added to your adjusted gross income, which can increase the portion of your Social Security benefits subject to federal tax (up to 85% may be taxable under the provisional income formula). This is another reason to model the full tax impact before converting.
What about the "backdoor Roth" strategy?
A backdoor Roth involves making a nondeductible contribution to a traditional IRA and then immediately converting it to a Roth. The OBBBA did not eliminate this strategy. However, the pro-rata rule still applies. If you have existing pre-tax IRA balances, a portion of the conversion will be taxable. The strategy works best when you have zero pre-tax IRA balances.
Should I convert all at once or spread conversions over several years?
Spreading conversions over multiple years (sometimes called a "Roth conversion ladder") lets you control how much income you add each year, potentially keeping yourself in a lower tax bracket. This approach is especially useful in the years between early retirement and when RMDs begin at age 73.
How K&R Taxes Can Help
A Roth IRA conversion is a powerful planning tool, but the tax consequences depend on your specific income, existing IRA balances, filing status, and long-term goals. At K&R Taxes, we help Arizona taxpayers model Roth conversion scenarios, navigate the pro-rata rule, and build multi-year conversion plans that minimize lifetime taxes. Whether you are experiencing a temporary income dip, approaching retirement, or planning your estate, our team can help you determine the right amount and timing for your conversion.
Call us at 866-402-8990 or schedule a consultation to discuss your Roth conversion strategy.
