What happens when you convert a traditional IRA to a Roth IRA?

A Roth IRA conversion moves money from a traditional IRA into a Roth IRA. You pay federal and North Carolina income tax on the taxable portion in the year you convert. After that, the money grows tax-free in the Roth, and qualified withdrawals in retirement are not taxed. Whether that trade-off makes sense depends on your income now, your expected income later, your age, and several other factors that change from one person to the next.

This guide walks through how conversions work, the tax rules at the federal and state level, the rules that catch people off guard, and how a conversion can ripple through other parts of your retirement income picture. It does not recommend whether you should convert. That depends on your situation, and a licensed tax professional can help you think through the specifics.

What a Roth IRA conversion actually does

With a traditional IRA, contributions may have been tax-deductible, and the money grows tax-deferred. You pay income tax when you withdraw it, and you are required to take minimum distributions starting at a set age.

A Roth IRA works differently. Contributions are made with after-tax dollars, qualified withdrawals are tax-free, and there are no required minimum distributions during the owner's lifetime.

A conversion bridges the two. You move funds from the traditional side to the Roth side and pay income tax on the amount converted in that tax year. The idea is to shift taxation from the future to the present, but that shift comes with an immediate tax bill and some rules worth understanding before you do anything.

How the conversion process works

There are three common ways to move money from a traditional IRA to a Roth IRA:

• Trustee-to-trustee transfer. Your traditional IRA custodian sends the funds directly to your Roth IRA custodian. You never touch the money. This is the most straightforward method and avoids potential withholding issues.
• Same-trustee transfer. If both IRAs are held at the same institution, the custodian moves the funds internally. In practice, it works like a trustee-to-trustee transfer.
• 60-day rollover. You receive a distribution from your traditional IRA and deposit it into a Roth IRA within 60 days. This carries more risk. Miss the 60-day window and the distribution may be treated as taxable income with potential penalties. The custodian may also withhold money for federal taxes, which you would need to make up from other funds to avoid a shortfall in the Roth account.

For most people, a direct trustee-to-trustee transfer is the least complicated option. You can convert all or part of a traditional IRA, and there is no limit on how much you convert in a given year. There is also no income limit on conversions, unlike direct Roth contributions, which have income phase-outs. Regardless of the method, the taxable amount is reported on IRS Form 8606 when you file your tax return.

The immediate tax hit: federal and North Carolina

The taxable portion of the conversion gets added to your ordinary income for the year. That includes both pre-tax contributions and earnings. You pay federal income tax on that amount at your marginal rate, and you pay North Carolina state income tax on the same amount.

Federal tax treatment

The IRS treats the taxable portion of a Roth conversion as ordinary income. It is not a capital gain, and there is no special lower rate. If you convert a $50,000 traditional IRA that is entirely pre-tax, that $50,000 gets added to your other income for the year. Depending on your total income and filing status, this could push you into a higher federal tax bracket for that year.

There is no deduction for the taxes you pay on the conversion, and you cannot spread the tax burden across multiple years unless future legislation creates that option. The entire taxable amount lands in the year the conversion happens.

North Carolina tax treatment

North Carolina generally conforms to the federal treatment of Roth conversions. The federally taxable amount is included in your state gross income. For 2026, North Carolina's flat individual income tax rate is 3.99%, down from 4.25% in 2025. That rate applies uniformly across the state, whether you live in Cary, Apex, Raleigh, Durham, or anywhere else in the Triangle.

One thing to verify with a tax professional: North Carolina has historically offered a retirement benefits deduction for certain types of retirement income. Whether that deduction applies to any portion of a Roth conversion in your situation may depend on your age, income type, and other details. The North Carolina Department of Revenue can clarify the current rules.

The pro-rata rule: why your full IRA balance matters

If your traditional IRA contains both pre-tax and after-tax (nondeductible) money, you cannot simply convert only the after-tax portion and avoid taxes. The IRS uses a pro-rata formula that looks at the total balance across all your traditional, SEP, and SIMPLE IRAs combined.

Here is how it works in plain terms: the IRS calculates what percentage of your total IRA balance is pre-tax. That same percentage of any conversion is taxable. So if 80% of your combined IRA balance is pre-tax and you convert $30,000, then $24,000 of that conversion is taxable, regardless of which specific dollars you intended to move.

This catches some people off guard. The aggregation happens across all traditional IRAs you own, even if they are at different institutions. You cannot get around the pro-rata rule by converting from a specific account or moving money between brokers first.

The five-year rules

Roth IRAs have two separate five-year rules, and they apply in different situations:

• Account-level five-year rule. For earnings to be withdrawn tax-free, the Roth IRA must have been open for at least five tax years. This clock starts with the first Roth contribution or conversion, whichever came first, and it does not restart with each new conversion.
• Per-conversion five-year rule. Each Roth conversion has its own five-year clock for the converted principal (the amount you paid taxes on). If you withdraw that converted principal before five years have passed and you are under age 59 1/2, a 10% early withdrawal penalty may apply to that portion. If you are 59 1/2 or older, this particular penalty does not apply.

These rules matter for people who plan to tap the converted funds relatively soon. If you are already past 59 1/2 and do not need to withdraw the money right away, the per-conversion penalty rule is less of a concern. But the account-level rule still applies to any earnings you withdraw.

How conversions interact with other retirement income

A Roth conversion does not happen in isolation. The extra income you report in the conversion year can ripple through other parts of your tax and benefits picture.

Social Security taxation

If you receive Social Security benefits, additional income from a conversion may increase the portion of your benefits that is subject to federal income tax. The IRS uses a formula based on your provisional income, which includes wages, interest, dividends, tax-exempt income, and half of your Social Security benefits, to determine how much of your Social Security is taxable. A large conversion in a year you are also collecting Social Security can push more of those benefits into the taxable column.

For Triangle-area retirees who are managing multiple income sources, this interaction can be easy to overlook. If your Social Security is already partially taxable, a conversion in the same year can make that worse in the short term.

Medicare IRMAA premiums

Medicare Part B and Part D premiums include an income-related adjustment called IRMAA (Income-Related Monthly Adjustment Amount). This surcharge is based on your modified adjusted gross income from two years prior. A Roth conversion that raises your MAGI in one year can trigger higher Medicare premiums two years later.

The timing gap is important. A conversion can affect Medicare premiums two years later. Some retirees are caught off guard by this lag. If you are on Medicare or approaching Medicare age, it is worth checking how this might apply with a tax or financial professional before converting. You can find current Medicare cost details at Medicare.gov , and more context on how these benefits interact with other income is on our Medicare and Social Security page.

Required minimum distributions

Conversions can also change your future tax picture in one important way. Traditional IRAs are subject to required minimum distributions (RMDs) starting at a specified age set by federal law. Each RMD is taxable income. Roth IRAs, by contrast, have no RMDs during the owner's lifetime.

By converting traditional IRA funds to a Roth, you remove those funds from the RMD pool. Over time, this can reduce the amount of forced taxable income you must take in later years. Whether that benefit is worth the upfront tax cost depends on your full income picture, your age, how long you expect to defer withdrawals, and what tax rates look like in the future, which nobody can predict with certainty.

What can change the answer

No two retirement situations are the same. Here are some of the variables that can shift whether a Roth conversion makes more or less sense for a given person:

• Current vs. future tax rates. If you expect to be in a lower tax bracket now than in the future, paying tax today could cost less overall. If you expect the opposite, waiting may be cheaper. The problem is that future tax rates are unknown.
• Size of the conversion. Converting a large amount in a single year can push you into a higher bracket or trigger IRMAA. Some people spread smaller conversions across multiple years to manage this, sometimes called a Roth conversion ladder.
• Source of funds to pay the tax. If you pay the conversion tax from the IRA itself, less money ends up in the Roth. Paying from non-IRA assets, like a savings account, preserves more of the converted balance for future growth.
• Age and time horizon. The longer the money stays in the Roth, the more time it has to grow tax-free. Someone with decades until withdrawal has more potential benefit than someone converting at 75.
• Estate planning goals. Roth assets pass to heirs tax-free, though non-spouse beneficiaries generally must withdraw within 10 years under current rules. Traditional IRA assets are taxable to heirs when withdrawn.
• Other income sources. Pensions, part-time work, rental income, and annuity payments all affect your tax bracket and how much a conversion adds to your total tax burden. Our retirement income page covers how different sources fit together.
• North Carolina tax rate. The state applies a flat rate of 3.99% for tax years beginning after 2025. Verify the current rate at the NCDOR tax rate schedules page.

Common mistakes and misconceptions

• "Only the earnings are taxed." Not true. The pre-tax contributions are also taxed on conversion. If your entire traditional IRA was funded with deductible contributions, the full amount is taxable.
• "I can undo it if I change my mind." Conversions made after 2017 cannot be recharacterized back to a traditional IRA. They are irreversible.
• "North Carolina does not tax conversions." It does. North Carolina follows the federal taxable treatment and applies its flat rate (3.99% in 2026) to the same amount that is taxable on your federal return.
• "I can avoid the pro-rata rule by converting a specific account." The IRS aggregates all traditional, SEP, and SIMPLE IRAs when calculating the taxable percentage. Moving money between institutions does not change this.
• "A Roth conversion is always a good idea." There is no universal answer. The trade-off depends on your current income, expected future income, age, health, estate plans, other income sources, and what tax rates do over the coming decades. Some people benefit. Others pay more in taxes than they save.

Questions to ask a licensed tax professional

A Roth conversion touches several areas of your financial picture at once. Before making any decisions, consider discussing the following with a tax professional who can review your specific details:

• What would the conversion add to my taxable income this year, and which federal bracket would it push me into?
• How does the pro-rata rule affect my situation? Do I have any nondeductible basis?
• How much of my Social Security would become taxable in the conversion year?
• Would the conversion trigger or increase my Medicare IRMAA surcharge two years from now?
• Does the North Carolina retirement benefits deduction apply to any portion of my conversion?
• What is my estimated total federal and state tax bill for the conversion?
• Does it make sense to spread the conversion across multiple years to stay in a lower bracket?
• How would the conversion affect my spouse's tax situation if we file jointly?
• What documents should I gather? Typically that includes recent IRA statements showing pre-tax and after-tax basis, prior-year tax returns, a Social Security award letter, and any Medicare premium notices.

Where Cary and Triangle residents can verify details

Tax rules change, and the numbers that apply to your situation depend on the year you convert and your individual details. Here are the official sources where you can check current information:

• IRS. Publication 590-A covers contributions and conversions. Publication 590-B covers distributions. The IRS also maintains a Retirement Plans FAQ page about IRAs.
• North Carolina Department of Revenue. Provides the current flat tax rate, guidance on how the state treats retirement income, and any applicable deductions at ncdor.gov.
• Social Security Administration. You can check your benefit estimate and learn how your benefits might be taxed at ssa.gov.
• Medicare.gov. Lists current IRMAA thresholds and premium amounts for Part B and Part D.

North Carolina applies the same tax rules statewide, so residents in Cary, Apex, Morrisville, Holly Springs, Raleigh, Durham, Chapel Hill, and the rest of Wake County all follow the same state tax structure. There is no county or city income tax to worry about.

If you have questions about how a Roth conversion might fit into your broader retirement income picture, you can ask a question on our site or visit our retirement income hub for more guides on income sources, tax interactions, and planning considerations. For Medicare and Social Security interactions specifically, our Medicare and Social Security page is a good place to start.