How Roth Conversions Are Taxed: Complete 2026 Guide for Smarter Bracket Planning

If you are trying to understand how roth conversions are taxed, start with one core rule: converted pre-tax dollars from a traditional IRA or old 401(k) are added to your ordinary taxable income for the year of conversion. They are not taxed at long-term capital gains rates. That makes conversions powerful in low-income years and risky in high-income years.

For 2026 planning, the practical goal is not just convert or not. The goal is to convert the right amount at the right time while controlling bracket spillover, deduction phase-outs, Medicare effects, and state taxes. IRS guidance sets the framework, Fidelity has emphasized deduction phase-out risk, and mainstream references like Investopedia and Bankrate highlight that conversion dollars usually fall into ordinary federal rates that can range from 10% to 37% depending on income and filing status. For related context, review our tax strategy hub, Roth conversion calculator walkthrough, and best tax deductions guide.

How Roth Conversions Are Taxed in 2026

1) What gets taxed

The taxable portion is generally your pre-tax contributions plus earnings. If all your traditional IRA money is pre-tax, almost every converted dollar is taxable as ordinary income in that year.

If you have nondeductible IRA basis, only part of a conversion is taxable. The IRS pro-rata rule applies across all your traditional, SEP, and SIMPLE IRAs. Example: if your combined IRA balances are $200,000 and your after-tax basis is $20,000, then 10% of a conversion is typically tax-free and 90% taxable. Convert $50,000, and roughly $45,000 is taxable.

2) What usually does not apply

A direct conversion itself is generally not hit with the 10% early-withdrawal penalty, but distributions not properly converted can be penalized. Also, each conversion has a 5-year clock for penalty-free access to converted principal if you are under age 59 1/2.

3) How it is reported

You usually see Form 1099-R for the distribution and Form 8606 to track basis and taxable conversion amounts. State returns may tax conversions differently, so federal planning alone is incomplete.

Decision Framework: Convert, Wait, or Split Across Years

Use this simple decision equation before converting:

Net conversion edge = expected future withdrawal tax rate - current all-in conversion rate

Where current all-in conversion rate includes:

• Federal marginal rate on the next conversion dollar
• State marginal rate
• Interaction drag from lost credits/deductions, ACA subsidy reduction, or Medicare premium effects

How to use it:

1. Estimate this year's taxable income before any conversion.
2. Calculate bracket headroom, meaning how much room remains before the next higher bracket.
3. Price hidden costs from MAGI increases.
4. Convert only up to the point where the net conversion edge is still positive.

Practical interpretation:

• Net edge above +5%: conversion is often attractive.
• Net edge between 0% and +5%: partial conversion can still make sense.
• Net edge below 0%: usually delay, unless estate or RMD goals dominate.

This framework beats gut feel because it forces you to compare lifetime tax rates, not just this year's refund.

Scenario Table: Quick Conversion Calls

Use this table for fast triage before building detailed projections.

The point is not perfect precision. The point is to avoid making a large one-year decision without checking second-order costs.

Fully Worked Numeric Example: Two-Year Partial Conversion

Assumptions:

• Married filing jointly, both age 52
• Traditional IRA balance: $1,200,000 (all pre-tax)
• Taxable income before conversion in 2026: $210,000
• Assumed federal bracket structure for planning: 22% up to $230,000 taxable income, 24% above that band
• State marginal tax rate: 5%
• Planned conversion amount: $90,000
• Long-term growth assumption on converted funds: 6.5% for 20 years
• Expected effective withdrawal tax rate later if left traditional: 30%

Step 1: Calculate 2026 conversion tax if done in one year

• First $20,000 fits remaining 22% bracket headroom: $4,400 federal tax
• Remaining $70,000 taxed at 24%: $16,800 federal tax
• Total federal tax: $21,200
• State tax at 5% on $90,000: $4,500
• Total immediate tax cost: $25,700

Step 2: Estimate long-run value created by tax-free Roth growth

• $90,000 compounded at 6.5% for 20 years is about $317,160
• If kept in traditional IRA and later taxed at 30%, after-tax value is about $222,012
• Gross spread in favor of Roth treatment: about $95,148

Step 3: Evaluate the tradeoff of paying tax now If the $25,700 tax payment would otherwise sit in low-yield cash earning about 3% after tax, its 20-year value is about $46,414. In that case, conversion still shows a wide projected edge.

If that same $25,700 could otherwise compound near 6.5%, the opportunity cost rises sharply to about $90,567, and the conversion edge becomes much thinner. This is why funding source matters:

• Paying conversion tax from separate low-return cash usually improves outcomes.
• Paying from high-growth capital can erase much of the advantage.
• Paying from the IRA itself often weakens results and may create additional penalties if done incorrectly.

Step 4: Why split across years anyway Even when total tax appears similar, splitting can reduce phase-out damage and premium shocks. A two-year plan can preserve deductions, improve cash flow, and lower regret risk if income surprises later.

Hidden Interactions That Raise the Real Tax Cost

Deduction and credit phase-outs

Fidelity has highlighted a key planning issue: conversion income can phase out deductions or credits you would otherwise keep. Depending on your profile, higher AGI or MAGI can affect education credits, student-loan related benefits, passive-loss usage, and other income-tested items. Their practical suggestions, such as bunching charitable giving or pairing conversion planning with tax-loss harvesting, are useful ways to reduce interaction drag.

Medicare IRMAA and Social Security taxation

For many households, the biggest surprise is Medicare premium impact. IRMAA uses a two-year lookback, so a conversion in one year can increase Part B and Part D premiums later. Conversion income can also increase how much Social Security is taxable for retirees already claiming benefits.

Estimated tax penalties and withholding mechanics

Large conversions can create underpayment risk if you wait until filing season. You may need quarterly estimated payments or strategic withholding to satisfy safe-harbor rules.

State tax treatment and relocation timing

State taxes can materially change the decision. A conversion in a high-tax state versus after a move can produce a large difference on the exact same IRA dollars.

Bottom line: the headline bracket is only step one. The real decision is all-in marginal cost.

Step-by-Step Implementation Plan

1. Pull your latest tax return and identify AGI, taxable income, and major deductions.
2. Build a 2026 income forecast before conversion, including wages, business income, dividends, and realized gains.
3. Compute bracket headroom and define a maximum conversion amount for each target bracket.
4. Confirm IRA basis using prior Form 8606 so pro-rata treatment is not guessed.
5. Run at least three conversion scenarios: conservative, base case, and aggressive.
6. Add interaction testing for deduction phase-outs, ACA effects, and Medicare lookback exposure.
7. Decide how conversion tax will be funded, prioritizing non-IRA cash when feasible.
8. Execute trustee-to-trustee conversion(s) and keep confirmation records.
9. Set quarterly estimates or withholding adjustments immediately after conversion.
10. Re-run projections in Q4 and adjust final tranche before year-end.

If you want companion reading, use best deductions for high-income earners and best deductions for individuals to reduce your all-in conversion rate.

30-Day Roth Conversion Checklist

Use this to move from analysis to execution without missing details.

Week 1 - Data and assumptions

• [ ] Export prior two years of tax returns and supporting schedules.
• [ ] Confirm IRA balances by account type: traditional, SEP, SIMPLE, Roth.
• [ ] Verify nondeductible basis history and locate Form 8606 records.
• [ ] Estimate year-end income using current paystubs and YTD statements.
• [ ] Create a draft bracket-headroom worksheet.

Week 2 - Modeling and risk checks

• [ ] Run one-year versus two-year conversion comparisons.
• [ ] Estimate state tax and check relocation timing opportunities.
• [ ] Model Medicare and subsidy impacts if applicable.
• [ ] Evaluate charitable bunching and loss-harvesting offsets.
• [ ] Decide a no-go threshold for total effective conversion tax.

Week 3 - Execution setup

• [ ] Coordinate with custodian on direct conversion process and timing.
• [ ] Set aside cash for federal and state tax payments.
• [ ] Confirm estimated-tax payment dates and safe-harbor strategy.
• [ ] Document rationale and assumptions for your tax file.

Week 4 - Finalize and monitor

• [ ] Execute conversion tranche.
• [ ] Verify transaction coding and custodial confirmations.
• [ ] Update tax projection with actual numbers.
• [ ] Schedule a Q4 review for final adjustment.
• [ ] Store all records in one folder for filing season.

Common Mistakes That Make Conversions Expensive

1. Converting to a round number without checking bracket headroom.
2. Ignoring the pro-rata rule and assuming basis is isolated in one IRA.
3. Paying conversion tax from retirement funds instead of outside cash.
4. Forgetting state taxes, then being surprised by cash needs.
5. Missing estimated payment requirements and incurring avoidable penalties.
6. Doing one large conversion late in the year without time to course-correct.
7. Failing to test MAGI-related phase-outs before committing.
8. Overlooking the 5-year clock rules for early access to converted amounts.
9. Assuming this year's tax law and rates will stay unchanged for decades.
10. Treating a conversion as a yes or no decision instead of a multi-year ladder.

A better approach is smaller, repeatable annual decisions with measurable thresholds.

How This Compares to Alternatives

Roth conversion is one tool, not the only tool. Compare it directly to alternatives:

Use conversion strategy alongside deduction planning, not in isolation. These pieces fit together with your broader plan from our blog library and implementation support in programs.

When Not to Use This Strategy

Roth conversion is often a poor fit when:

• Your current all-in marginal rate is clearly higher than expected retirement withdrawal rates.
• You cannot pay conversion tax from non-retirement assets.
• A conversion would destroy valuable income-tested benefits this year.
• You are planning to move to a much lower-tax state soon and can wait.
• Your emergency fund is weak and tax payments would reduce resilience.
• You need near-term access to converted funds and cannot satisfy timing rules.
• Your business income is highly uncertain and downside cash risk is elevated.

In these cases, preserving optionality can be more valuable than forcing a conversion.

Questions to Ask Your CPA/Advisor

1. What is my true all-in marginal rate on the next $1 of conversion income after federal, state, and phase-out effects?
2. How much bracket headroom do I have this year before my rate rises?
3. Does my Form 8606 basis change the taxable percentage under pro-rata rules?
4. Will this conversion affect Medicare premiums two years from now?
5. Should I split conversion into multiple tranches across this and next year?
6. What estimated tax payments should I schedule to avoid penalties?
7. Would charitable bunching or loss harvesting lower the conversion tax bill?
8. Should I delay conversion until after a planned state residency change?
9. How does this decision interact with my Social Security claiming timeline?
10. What is the break-even future tax rate for my specific conversion amount?

Practical Next Move

If your goal is reducing lifetime taxes, do not ask only whether conversion tax looks high this year. Ask whether your lifetime tax path improves after including brackets, deductions, premiums, and cash-flow tradeoffs. Build a one-year and two-year model, execute in tranches, and revisit every year. That process is usually more valuable than trying to find one perfect conversion number once.