Yes, you can convert a 401(k) to a Roth IRA, but you'll owe income tax on the amount you move

A 401(k)-to-Roth conversion means moving money from your employer retirement plan into a Roth IRA. The IRS allows this, but the conversion is treated as income in the year you do it. That means you'll pay federal income tax — and possibly state income tax — on whatever amount you convert. You don't have to convert the entire balance; you can convert part of it and leave the rest in your 401(k).

The main reason people convert is that Roth IRAs have no required withdrawals during your lifetime, and withdrawals in retirement are tax-free if you follow the rules. A traditional 401(k) requires you to start taking money out at age 73 (as of 2023), whether you need it or not. If you're in a lower tax bracket now than you expect to be in retirement, converting can save you money over time.

The conversion process itself is straightforward: you contact your 401(k) plan administrator, request a distribution, and either roll it directly to a Roth IRA (called a direct rollover) or receive a check and deposit it yourself within 60 days (called an indirect rollover). Direct rollovers are simpler and safer because the money never touches your hands.

Key Takeaways

  • You owe income tax on the full amount you convert in the year you convert it, calculated at your ordinary income tax rate.
  • You can convert part of a 401(k) or the whole thing, and you can do multiple conversions in different years.
  • A direct rollover to your Roth IRA is the safest method because the money goes straight from your 401(k) plan to the IRA without passing through your bank account.
  • If you have other traditional IRAs or SEP IRAs, the IRS counts all of them together when calculating the tax bill on your conversion — this is called the pro-rata rule.
  • You must have earned income in the year you convert, and you cannot convert after you reach age 73 if you're still working for the employer sponsoring the 401(k).

When you can and cannot convert

You can convert a 401(k) to a Roth IRA at almost any time, with one major exception: if you're still employed by the company that sponsors the 401(k), you usually cannot convert while you're working there. Once you leave the job — whether you retire, change employers, or are laid off — the conversion becomes available. Some plans allow in-service conversions while you're still employed, but this is rare and depends entirely on what your plan document says.

If you're self-employed or own a small business with a Solo 401(k), you can convert at any time because you control the plan. There's no age limit on conversions, so you can convert at 35 or 75. However, if you're still working for the employer sponsoring the plan and haven't separated from service, the plan rules may block you.

You do need earned income — wages, self-employment income, or taxable alimony — in the year you convert. You cannot convert if you have no income that year. The amount you convert doesn't have to match your income; you could earn $5,000 and convert $50,000, but you'll owe tax on the full $50,000.

The tax bill: how much you'll owe

The amount of tax you owe depends on two things: the size of the conversion and your total income that year. The IRS treats the conversion as ordinary income, meaning it's taxed at the same rate as wages or salary. If you convert $50,000 and you're in the 24% federal tax bracket, you'll owe roughly $12,000 in federal tax (plus any state income tax, which varies by state).

The tricky part is the pro-rata rule. If you have any traditional IRAs, SEP IRAs, or SIMPLE IRAs in addition to your 401(k), the IRS counts all pre-tax money across all those accounts when calculating your tax. For example: if you have $100,000 in a traditional IRA and $50,000 in a 401(k), and you convert the entire 401(k), the IRS treats it as if you converted $50,000 out of a total $150,000 pool. This can result in a larger tax bill than you'd expect. Roth IRAs don't count toward this calculation — only pre-tax accounts do.

You pay the tax from your own pocket when you file your return; the 401(k) plan doesn't withhold it automatically. Some people set aside money from savings or use a separate income source to cover the tax bill, so they don't have to withdraw extra from the 401(k) to pay it.

Direct rollover versus indirect rollover

A direct rollover is when the 401(k) plan sends the money straight to your Roth IRA custodian (the bank or brokerage holding your IRA). You never see the money. This method has no 60-day deadline and no risk of accidentally missing the window to deposit it. The plan sends a check to the IRA custodian, or the money moves electronically. This is the safest route.

An indirect rollover is when the plan sends you a check. You then deposit it into your Roth IRA within 60 days. If you miss the 60-day window, the IRS treats it as a withdrawal, and you'll owe tax plus a 10% penalty if you're under 59½. The plan is also required to withhold 20% of the amount for federal taxes, so if you convert $50,000, you'll receive a check for $40,000 and have to come up with the $10,000 withholding from your own money to complete the rollover. You'll get the withheld amount back when you file your tax return, but only if you deposited the full $50,000 into the IRA.

Most people choose direct rollover because it's simpler and avoids the withholding trap. Contact your 401(k) plan administrator and ask for a direct rollover form. You'll need to provide your Roth IRA account number and the name and address of your IRA custodian.

What happens to employer match and company stock

If your 401(k) includes employer matching contributions, those can be converted just like your own contributions. The entire balance — your contributions, employer match, and any investment gains — is subject to the conversion and the resulting tax bill. You cannot pick and choose which parts to convert; you either convert a portion of the total or the whole thing.

If your 401(k) holds company stock, you have a choice. You can convert the stock itself into the Roth IRA (it will continue to be held as stock), or you can sell it first and convert the cash. Some people sell the stock to diversify, since holding a large position in your employer's stock in a retirement account concentrates risk. The tax bill is the same either way — you owe tax on the full value of the stock on the day of conversion, regardless of whether you sell it.

The pro-rata rule and why it matters

The pro-rata rule is the biggest tax trap in conversions. It applies whenever you have both pre-tax and after-tax money in any IRA or 401(k). The rule says you cannot convert only the after-tax portion and leave the pre-tax portion behind; instead, the IRS treats all conversions as if they come proportionally from both pre-tax and after-tax money.

Example: You have $80,000 in a traditional IRA (pre-tax) and $20,000 in a Roth IRA (after-tax). You want to convert $20,000 from your 401(k) to your Roth IRA. The IRS says you're converting from a pool of $100,000 total pre-tax money (the $80,000 traditional IRA plus the $20,000 from the 401(k)). So 80% of your conversion ($16,000) is treated as pre-tax, and you owe tax on that amount. The pro-rata rule applies across all your IRAs and 401(k)s, not just one account.

The pro-rata rule does not apply if you have no other IRAs. If your only retirement account is the 401(k) you're converting, you convert the full amount and owe tax only on that amount. This is why some people with large traditional IRAs roll them back into their 401(k) before converting — if the 401(k) plan allows it — to remove them from the pro-rata calculation.

After the conversion: Roth IRA rules you need to know

Once money is in your Roth IRA, it follows Roth rules. You can withdraw your contributions (the amount you put in) at any time without tax or penalty. Withdrawals of earnings (investment gains) before age 59½ are subject to tax and a 10% penalty, unless you meet an exception like disability or a first-time home purchase (up to $10,000 lifetime).

There's a five-year rule: you must wait five years from the year you convert before you can withdraw the converted amount without penalty, even if you're over 59½. The five-year clock starts on January 1 of the year you convert. If you convert in 2024, the five-year period ends on January 1, 2029. Each conversion has its own five-year period, so if you convert again in 2025, that conversion has a separate five-year clock.

Roth IRAs have no required minimum distributions during your lifetime. You can leave the money untouched for decades if you want. When you pass away, your beneficiaries inherit the Roth IRA and can withdraw it tax-free (though they must follow distribution rules depending on their relationship to you).

Frequently Asked Questions

Do I have to convert my entire 401(k) at once?

No. You can convert part of your 401(k) and leave the rest in the plan or roll it to a traditional IRA. You can also do multiple conversions in different years. Each conversion is a separate transaction with its own tax bill.

What if I change my mind after converting?

You can undo a conversion by doing a recharacterization, but only if you do it by the tax filing deadline (usually April 15 of the following year, plus extensions). The money goes back to a traditional IRA or 401(k), and you don't owe tax on the conversion. However, any investment gains or losses that occurred after the conversion stay with the money when it moves back. Recharacterizations are rare and usually only done if the market drops sharply after you convert.

Can I convert if I'm retired and not working?

You need earned income in the year you convert. If you're retired with no wages or self-employment income, you cannot convert. However, if you have a pension or Social Security, those don't count as earned income for this purpose. If you have no earned income, you'll have to wait until a year when you do.

Will converting affect my Social Security or Medicare?

Yes, the conversion counts as income in the year you do it, which can affect your Social Security tax (if you're under full retirement age and still working) and your Medicare premiums (higher income means higher premiums). Plan the conversion timing carefully if you're close to these thresholds.

What if my 401(k) plan doesn't allow conversions?

Some older 401(k) plans don't permit conversions while you're employed. Once you leave the job, you can roll the 401(k) to an IRA and then convert. If the plan truly doesn't allow any conversions even after separation, you can roll it to a traditional IRA first, then convert from the IRA to the Roth.