How to Pay the Tax on a Roth Conversion
- Jul 16
- 6 min read
By Kenneth M. Ford, AWMA®, AIF®
Last Updated: July 2026
Estimated Reading Time: 7–8 minutes
Quick Answer
Pay the conversion tax from money outside the IRA. This is the single most important execution rule.
If you use IRA dollars to pay the tax, less money lands in the Roth — dollar for dollar — and the tax-free compounding engine is permanently smaller. Before 59½, that withdrawal is also a taxable distribution and can trigger a 10% early-withdrawal penalty.
Three further rules:
• Transfer securities in kind. You don’t have to sell to convert. Move the shares as they are and stay invested.
• Convert your highest-growth assets first. Tax-free compounding should happen on the assets expected to grow the most.
• Treat it as irreversible. Recharacterization was eliminated in 2018. There is no undo.
Why This Matters
Even a well-planned Roth conversion can produce a disappointing outcome if it's executed poorly. Decisions like where you pay the tax from, which assets you convert, and whether you stay invested can have a lasting impact on the value of the strategy.
Rule 1:Pay Roth Conversion Tax From Outside the IRA
When deciding how to pay Roth conversion tax, you generally have two options: use money from inside the IRA or pay the tax with funds from outside the IRA.
Pay it from outside. Nearly always.
Here’s the arithmetic. Convert $200,000 and pay the tax from a taxable brokerage account, and the full $200,000 lands in the Roth and compounds tax-free for the rest of your life.
Convert $200,000 and withhold $48,000 from the IRA to cover the tax, and only $152,000 actually reaches the Roth. You’ve shrunk the engine by nearly a quarter before it ever starts running — and that reduction compounds for decades.
Before 59½, it’s worse. The dollars withheld to pay the tax are themselves a taxable distribution and can trigger a 10% penalty.
This is why an IRA millionaire with a healthy taxable brokerage account is far better positioned to convert than one whose entire net worth sits inside the IRA.
Identify the cash before you convert — not in April.
Rule 2: Move the Investments In Kind
Many investors assume they must sell their investments before completing a Roth conversion. In most cases, that's not necessary.
Securities can be transferred from the traditional IRA to the Roth as they are — same funds, same shares, same positions. You remain invested throughout. You avoid trading costs, and you avoid being out of the market on a day that turns out to matter.
Only the value of what moves is taxed. The act of moving it is not a sale.
A useful corollary: converting a holding while it is temporarily depressed means you pay tax on the lower value — and the recovery happens inside the Roth, tax-free.
Rule 3: Convert Your Highest-Growth Assets First
If some money is going into the Roth and some is staying in the traditional IRA, which assets you move is not arbitrary.
The Roth is where tax-free compounding happens. So the holdings with the greatest expected appreciation belong there soonest.
Slower-growing, income-oriented assets can remain in the traditional IRA, where the eventual tax falls on a smaller gain.
Same conversion. Same tax bill today. Meaningfully different outcome in twenty years.
Rule 4: Treat the Decision as Irreversible
Recharacterization — the ability to undo a conversion — was eliminated in 2018.
Once you convert, it’s done. If you convert too much and discover in April that you crossed an IRMAA threshold or pushed into a higher bracket, there is no going back.
That permanence is exactly why the sizing deserves genuine analysis rather than a December scramble.
A Note on Withholding
It is generally better to pay the conversion tax through estimated tax payments from outside funds than to have tax withheld from the conversion itself — because withholding from the conversion is, by definition, paying from the IRA.
Coordinate this with your CPA. Safe-harbor rules and underpayment penalties are real, and a large conversion can create an estimated-payment obligation that catches people off guard.
Advisor Insight
The most expensive execution error we see isn’t dramatic. It’s a client who converts in December, has the custodian withhold 24% for federal tax, and never realizes that the withholding came out of the conversion — quietly reducing what reached the Roth by nearly a quarter, and possibly triggering a penalty if they were under 59½.
The conversion was the right size. The execution cost them years of tax-free growth.
Before any Roth conversion is processed, ask one simple question: "Where is the tax coming from?" The answer often determines whether a good strategy becomes a great one—or a costly mistake.
Example
The difference becomes even clearer with an example.
Patricia, 64, converts $150,000 from a traditional IRA. Her marginal rate is 24%, so she owes roughly $36,000 in federal tax.
Option A — pay from the IRA. She has the custodian withhold $36,000. Only $114,000 reaches the Roth. Assuming 6% growth over 25 years, that $114,000 becomes roughly $489,000 tax-free.
Option B — pay from her brokerage account. The full $150,000 reaches the Roth. At the same 6% over 25 years, it becomes roughly $644,000 tax-free.
Same conversion. Same tax bill. A difference of roughly $155,000 in tax-free wealth — created entirely by where the tax came from.
Hypothetical illustration. Assumes 6% annual growth over 25 years and a 24% federal marginal rate. Not a prediction, recommendation, or guarantee. Individual results vary.
Common Mistakes
Letting the custodian withhold tax from the conversion. This is paying from the IRA, whether it feels like it or not.
Converting without the outside cash identified. Decide where the tax is coming from first.
Selling to convert. Unnecessary. Transfer in kind and stay invested.
Converting slow-growth assets first. The Roth should hold what’s expected to grow most.
Assuming you can fix it later. You cannot. There is no recharacterization after 2018.
Frequently Asked Questions
Why is paying tax from the IRA so damaging? Because it directly reduces the amount that lands in the Roth, and that reduction compounds tax-free for the rest of your life. It’s not a one-time cost — it’s a permanently smaller engine.
Can I have taxes withheld from the conversion if I’m over 59½? You can, and there’s no penalty — but it’s still generally suboptimal, because it shrinks the Roth balance. Paying from outside funds remains preferable.
Do I have to sell my investments to convert? No. Securities can be transferred in kind. You stay invested throughout.
Should I make estimated tax payments? Usually, for a large conversion. Coordinate with your CPA — safe-harbor rules and underpayment penalties apply.
Which assets should I convert first? Generally those with the highest expected growth, since the Roth is where tax-free compounding happens.
Key Takeaways
Pay the conversion tax from outside the IRA: This is the single most important rule.
Paying from the IRA reduces your Roth balance: It shrinks the amount converted dollar for dollar and, before age 59½, may trigger a 10% penalty.
Transfer investments in kind: You generally don't have to sell your investments to complete a Roth conversion.
Convert higher-growth assets first: That's where tax-free compounding has the greatest long-term potential.
Remember that Roth conversions are permanent: Since 2018, completed conversions generally cannot be reversed.
Continue Learning
Final Thoughts
Pay the tax from outside the IRA. Transfer in kind. Convert the highest-growth assets first. Size each year to your true marginal rate. And remember that it cannot be undone.
The amount is half the decision. The execution is the other half — and it’s the half most people never think about.
Get the Execution Right
A Roth conversion isn't just about deciding whether to convert—it's also about how you convert. Small execution decisions, like where you pay the tax from or which assets you convert, can have a meaningful impact on the long-term value of the strategy.
A Roth Conversion Analysis can help you evaluate not only how much to convert, but also how to execute the conversion in a way that supports your long-term retirement goals.
Disclaimer
This article is for educational purposes only and should not be considered tax, legal, or investment advice. Roth conversions, Medicare premiums, IRMAA surcharges, required minimum distributions, and retirement income strategies should be evaluated based on your individual circumstances, including your income sources, tax situation, retirement goals, and broader financial plan. All examples are hypothetical, are provided for illustration only, and are not a guarantee or prediction of any particular result; individual results will vary. Figures reflect 2026 federal parameters and are subject to change. Tax laws, Medicare rules, premium amounts, and IRMAA thresholds change over time. Consult qualified tax and financial professionals before making financial decisions.
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