How a Roth conversion works

A Roth conversion moves money from a tax-deferred wrapper, such as a traditional IRA, into a Roth wrapper. The converted dollars are included in taxable income for that year. After the conversion, the Roth account holds those dollars as already-taxed principal under the usual Roth design.

The teaching identity is

$$\text{tax} = C \times r$$

where $C$ is the converted amount and $r$ is the marginal tax rate on those extra dollars. Convert $20,000 at 22 percent and the tax is $4,400.

That 22 percent is the rate on the converted slice in a stacked schedule, not a claim that the whole return pays 22 percent. The marginal tax explorer shows how a conversion can fill one band and enter another.

If the $4,400 is paid from a taxable account, the Roth can keep the full $20,000. If the tax is withheld from the conversion, the Roth starts smaller and the withheld dollars never compound inside it.

For comparison, leave the same $20,000 in the tax-deferred account. At a 7 percent teaching rate for 20 years, with no further contributions, it grows to $77,393.69 before withdrawal tax. Of that total, $20,000 is the starting amount and $57,393.69 is growth.

The compound interest calculator is that growth engine. The 7 percent is an illustration, not a forecast.

Leaving the money in the pre-tax wrapper defers tax until withdrawal, when the withdrawn dollars are ordinary income at whatever stacked rate applies then. Converting pays tax now so later qualified Roth withdrawals are not taxed again under that design.

Which side is cheaper depends on the rate now, the rate later, and whether the tax is paid from outside. A fair comparison also tracks what happens to outside money used to pay, or retained instead of paying, the conversion tax.

The Roth against traditional comparison sets the two wrapper paths beside each other. Tax-advantaged accounts places both wrappers in the wider account set.

The figures are a teaching conversion: $20,000 at 22 percent creates $4,400 of current tax. The same $20,000 left tax deferred for 20 years at 7 percent reaches $77,393.69 before any later withdrawal tax.

An actual conversion follows taxable basis, the full income stack, state tax, conversion ordering, withdrawal rules, and future rates. This is educational material, not financial advice.