You can convert a 401k to a Roth IRA, but the IRS taxes the money you move as ordinary income in the year you do it

A Roth conversion means taking money from a traditional 401k (or similar workplace plan) and moving it into a Roth IRA. The money goes into the Roth account tax-free after that year, but you owe federal income tax on the full amount you convert in the year you move it. This is different from a regular Roth contribution, where you pay tax on the money before you put it in.

You can do a conversion at any age and at any income level — there are no income limits that block you from converting, unlike regular Roth contributions. However, you must have access to the 401k money first. If you still work for the employer that runs your 401k, you may not be able to convert until you leave the job, retire, or reach age 59½, depending on your plan's rules.

The main reason people convert is to move money into an account where withdrawals in retirement are tax-free. The main reason they hesitate is the tax bill that arrives the same year.

Key Takeaways

  • You pay ordinary income tax on the full amount you convert in the year you move it, which can push you into a higher tax bracket.
  • You must have a Roth IRA open before you convert; if you do not, you will need to open one first at a bank or brokerage.
  • If you still work for the employer that sponsors your 401k, check your plan documents or call your plan administrator to learn when conversions are allowed.
  • After you convert, the money sits in the Roth IRA for five tax years before you can withdraw the earnings tax-free, even if you are over 59½.
  • A conversion is permanent — you cannot undo it after the tax year ends, so calculate the tax impact before you move the money.

When you can convert depends on your employment status

If you have left your job or are retired, you can convert your old 401k to a Roth IRA at any time. Contact the company that holds your 401k (your plan administrator) and ask for a direct rollover to a Roth IRA. Provide the name and account number of the Roth IRA you want the money to go into. The administrator will send the funds directly to that account, and you will owe tax on the amount in that tax year.

If you still work for the employer that sponsors your 401k, conversion rules depend on your plan. Some plans allow in-service conversions, which means you can convert while still employed. Others do not allow conversions until you separate from the company, reach 59½, or experience a hardship withdrawal event. Your plan administrator or HR department can tell you whether your specific plan allows in-service conversions. Ask for this in writing so you have documentation.

If your plan does not allow conversions now, you have two options: wait until you leave the job, or ask your employer whether they plan to add this feature. Some employers add in-service conversion options during plan updates.

The tax bill arrives in the same year you convert

When you convert, the IRS treats the money as taxable income for that year. If you convert $50,000, you add $50,000 to your taxable income on your tax return. This can move you into a higher tax bracket and increase what you owe in federal income tax.

You do not have to pay the tax from the conversion money itself. You can pay it from other savings or from your paycheck. However, if you use money from the 401k to pay the tax, that additional withdrawal also counts as taxable income, which makes the tax bill larger. Most people pay the tax from outside money to avoid this.

State income tax also applies in most states. If you live in a state with income tax, you will owe state tax on the conversion amount as well. A few states (like Florida, Texas, and South Dakota) have no state income tax, so residents of those states owe only federal tax.

Before you convert, use a tax calculator or talk to a tax professional to estimate what you will owe. A large conversion in a year when you already have high income can result in a much larger tax bill than you expect.

You need a Roth IRA account before the money can arrive

If you do not already have a Roth IRA, you must open one before you request the conversion. You can open a Roth IRA at most banks, credit unions, and brokerages (Fidelity, Vanguard, Charles Schwab, and others all offer them). Opening an account takes 10 to 20 minutes online and requires your Social Security number, address, and basic employment information.

Once the account is open, you will have an account number. Provide this number to your 401k plan administrator when you request the rollover. The administrator will send the conversion money directly to that Roth IRA account.

Do not have the money sent to you personally. If the 401k administrator sends the check to you instead of directly to the Roth IRA, the IRS may treat it as a withdrawal rather than a conversion, which means you could owe a 10% early withdrawal penalty if you are under 59½, even if you deposit the money into the Roth IRA yourself within 60 days.

The five-year rule limits when you can withdraw earnings

After you convert, the money sits in your Roth IRA under a five-year holding period. This rule says you cannot withdraw the earnings (the investment gains) from that conversion without owing tax and possibly a 10% penalty until five tax years have passed since January 1 of the year you converted.

The money you converted (the principal) can be withdrawn anytime without tax or penalty. Only the earnings are restricted. If you convert $50,000 and it grows to $55,000, you can withdraw the $50,000 anytime, but the $5,000 in earnings is locked until the five-year period ends.

If you are 59½ or older when the five-year period ends, you can withdraw the earnings tax-free. If you withdraw them before age 59½ and before five years have passed, you owe income tax on the earnings plus a 10% penalty.

You cannot undo a conversion after the tax year ends

Before 2018, you could undo a conversion by filing a tax form called a recharacterization. That option no longer exists. Once you convert, the conversion is permanent. If the market drops and your conversion is now worth less than you expected, you cannot reverse it and redo it later.

This is why calculating the tax impact before you convert is critical. If you convert $100,000 and the market drops to $80,000 by the end of the year, you still owe tax on the full $100,000 you converted, not the $80,000 it is worth now.

Some people convert in small amounts over multiple years to spread out the tax bill and reduce the risk that a market drop will leave them with a large tax bill on money that is now worth less. This is called a ladder conversion.

Pro-rata rule complications if you have other IRAs

If you have a traditional IRA, SEP IRA, or SIMPLE IRA in addition to your 401k, the pro-rata rule affects your conversion. This rule says the IRS treats all your traditional IRAs as one account for tax purposes. When you convert, the tax is calculated based on the total value of all your traditional IRAs, not just the amount you are converting.

For example: you have a traditional IRA worth $100,000 and you want to convert $50,000 from your 401k to a Roth IRA. The IRS sees $100,000 in traditional IRAs. It calculates that 50% of your traditional IRA money is pre-tax and 50% is after-tax. When you convert the $50,000, you owe tax on $25,000 of it (50%), not the full amount.

If you have after-tax money in a traditional IRA (money you contributed but did not deduct), talk to a tax professional before converting. The pro-rata rule can create unexpected tax bills if you are not careful.

Frequently Asked Questions

Can I convert my 401k if I am still working?

Only if your employer's plan allows in-service conversions. Contact your HR department or plan administrator to ask. If your plan does not allow it, you can convert after you leave the job or reach age 59½.

What happens if I convert and then need the money back?

You can withdraw the money you converted (the principal) anytime without penalty. You will owe tax on any earnings if you withdraw them before age 59½ and before five years have passed since the conversion. The tax bill from the conversion itself does not change — you still owe it even if you withdraw the money later.

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

No. You can convert part of your 401k and leave the rest in the plan or roll it into a traditional IRA. You can also do multiple conversions over different years. Each conversion is taxed separately in the year it happens.

What if I convert and the market drops before the end of the year?

You still owe tax on the full amount you converted, not the lower value it has now. This is why some people convert smaller amounts over multiple years instead of one large conversion.

Can I convert if I am over 72 and taking required minimum distributions?

Yes, but the amount you convert counts toward your required minimum distribution for that year. If you are required to withdraw $20,000 and you convert $30,000, you have satisfied your requirement and have $10,000 extra. Talk to a tax professional about the order of operations, because it affects your tax bill.