Roth Conversion Strategy 2026

Converting a traditional IRA to a Roth IRA is a permanent, taxable event. The converted amount is added to your income in the year of conversion and taxed at ordinary income rates. Done strategically, that upfront tax bill eliminates future required minimum distributions and locks in decades of tax-free growth. Done carelessly, it pushes you into a higher bracket or triggers Medicare surcharges you did not anticipate.

How a Roth Conversion Is Taxed

The converted amount is reported on Form 1099-R (issued by the custodian) and on Form 8606 Part II, which computes the taxable portion. If your traditional IRA holds entirely pre-tax contributions, 100% of the converted amount is taxable. If you have tracked nondeductible contributions on prior Forms 8606, a portion of the conversion is tax-free under the pro-rata rule.

There is no 10% early withdrawal penalty on the conversion itself. However, if you are under age 59.5 and use IRA funds to pay the tax on the conversion, the amount withdrawn to cover taxes is a separate distribution subject to the 10% penalty plus ordinary income tax.

The Pro-Rata Rule

Under IRC Section 408(d)(2), the IRS treats all of your traditional, SEP, and SIMPLE IRAs as a single pool when calculating how much of a conversion is taxable. You cannot cherry-pick an account and convert only the after-tax dollars.

Example. You have a $90,000 traditional IRA (all pre-tax) and a $10,000 IRA with $10,000 of after-tax basis. You convert $20,000. Total IRA balance: $100,000. Pre-tax balance: $90,000. Taxable fraction: 90%. Taxable amount: $18,000.

The pro-rata rule is why the backdoor Roth strategy requires eliminating pre-tax IRA balances first, either by rolling them into a 401(k) or converting them separately.

When Roth Conversion Makes the Most Sense

Early retirement before RMDs. The window between retiring and age 73 (when RMDs must begin under SECURE 2.0) is often the most favorable period for conversions. Earned income has stopped, Social Security may not have started, and the wide lower brackets offer room to convert at rates that disappear once RMDs pile on top of other income.

Business loss or low-income year. A large ordinary loss from a business, rental, or net operating loss carryforward can absorb a conversion and produce little or no additional tax.

OBBBA bracket stability. The One Big Beautiful Bill Act permanently extended the TCJA tax rate structure, so current rates no longer face a sunset date. The bracket-filling logic still holds year to year: convert enough to fill the current bracket without crossing into the next.

Bracket-Filling for 2026

For 2026, the 22% bracket for married filing jointly runs from $96,951 to $206,700 and the 24% bracket runs from $206,701 to $394,600 (per Rev. Proc. 2025-32). A couple with $150,000 of taxable income could convert up to $56,700 before entering the 24% bracket.

Run the projection before December 31. Account for capital gains, Social Security benefits, and any ACA marketplace premium tax credits that could be reduced by the income increase.

IRMAA: Watch the Medicare Threshold

Medicare surcharges (IRMAA) are based on MAGI from two years prior. A large 2026 conversion affects 2028 Medicare premiums. For 2026, the first IRMAA tier begins above $106,000 for single filers and $212,000 for married filing jointly. Partial conversions that stay under those thresholds avoid the surcharge entirely.

Conversions Are Permanent

The Tax Cuts and Jobs Act eliminated recharacterization of Roth conversions for tax years after 2017. There is no way to undo a conversion after the fact. Convert only what you can afford to pay tax on with outside funds. Using IRA money to pay the conversion tax reduces the amount that ends up in the Roth and, for taxpayers under age 59.5, triggers the 10% early distribution penalty on that portion.

Have questions about Roth conversion planning? Contact TS CPA for a free consultation. We respond within the same day.