Yes, you can roll a 401k into a Roth IRA, but it triggers taxes on the amount you convert

A Roth conversion lets you move money from a traditional 401k into a Roth IRA. The IRS allows this, but the money you convert counts as taxable income in the year you do it. If you convert $50,000, you owe income tax on that $50,000 as if you earned it that year. You pay the tax from your own pocket — it does not come out of the amount you move. The money then grows tax-free in the Roth IRA, and you can withdraw it tax-free after age 59½ if the account has been open at least five years.

This is different from a regular rollover, where you move pre-tax money from one 401k to another 401k or to a traditional IRA without paying tax. A Roth conversion is a deliberate choice to pay tax now in exchange for tax-free growth later.

Key Takeaways

  • You can convert a 401k to a Roth IRA, but you pay income tax on the full amount converted in that tax year.
  • You must have earned income in the year you convert, and you cannot convert money that is still in an active employer plan — only from a 401k you left behind or from a previous employer.
  • The tax bill is due when you file your return, not when you move the money, so plan your cash flow carefully.
  • A Roth conversion makes sense if you expect to be in a higher tax bracket later or want tax-free withdrawals in retirement.

When you can and cannot do a Roth conversion

You can convert a 401k to a Roth IRA only after you leave the employer who sponsored the plan. If you still work for the company and the 401k is active, you cannot convert it. Once you leave — whether you quit, retire, or are laid off — you can roll the money out.

Some employers allow in-service conversions, which means you can convert while still employed, but this is rare and depends entirely on your plan's rules. Check with your plan administrator or HR department to see if your current 401k allows it.

You also need earned income in the year you convert. This means W-2 wages, self-employment income, or other compensation you report to the IRS. If you have no earned income that year, you cannot convert.

The tax bill you owe on a conversion

When you convert, the IRS treats the money as ordinary income. Your tax bracket determines how much you owe. If you are in the 22% federal tax bracket and convert $50,000, you owe roughly $11,000 in federal tax (plus any state income tax, depending on where you live).

The tax is due when you file your return for that year. The money does not come out of the conversion itself — you pay it separately from your bank account or by having less refunded to you. This is a common mistake: people convert $50,000 expecting to move $50,000 to the Roth, then are surprised when they owe $11,000 in taxes.

If you cannot pay the tax bill from other money, you can withdraw from the conversion itself to cover it, but that withdrawal also counts as taxable income and may trigger a 10% early-withdrawal penalty if you are under 59½. This spiral is why financial advisors recommend converting only if you have cash on hand to pay the tax.

The pro-rata rule: why converting gets complicated if you have other IRAs

If you have a traditional IRA, SEP IRA, or SIMPLE IRA in addition to the 401k you want to convert, the pro-rata rule applies. This rule says the IRS treats all your IRAs as one pool for tax purposes. If 80% of that pool is pre-tax money and 20% is after-tax money, then 80% of any conversion is taxable.

Example: You have a traditional IRA with $100,000 in pre-tax contributions and a 401k with $50,000 you want to convert to a Roth. The pro-rata rule looks at the total: $150,000 in the IRA pool, of which $100,000 is pre-tax. That is 67% pre-tax. So 67% of your $50,000 conversion — about $33,500 — is taxable. You cannot cherry-pick the after-tax portion.

The pro-rata rule does not apply to 401k-to-401k rollovers or to money still in an employer plan. It only kicks in when you roll into an IRA. This is why some people keep their 401k separate and do not roll it into an IRA until they are ready to convert.

How to actually move the money

Contact your 401k plan administrator or the financial institution holding your 401k. Tell them you want to do a Roth conversion. They will send you a form to complete. You have two options for how the money moves:

Direct rollover: The 401k custodian sends the money straight to your Roth IRA custodian. No tax withholding happens, and you do not touch the money. This is the cleanest route.

Indirect rollover: The 401k custodian sends you a check. You then deposit it into your Roth IRA within 60 days. The custodian usually withholds 20% for federal taxes, so if you convert $50,000, you receive a check for $40,000 and owe the full $50,000 in taxes. You have to come up with the $10,000 withholding from your own pocket and deposit it into the Roth within 60 days, or it counts as a non-rollover distribution and you owe tax plus penalties. Indirect rollovers are riskier and more complicated.

Use a direct rollover whenever possible. It is faster, safer, and avoids the withholding trap.

Reasons to convert and reasons to wait

A Roth conversion makes sense if you expect your tax bracket to be higher in retirement than it is now. If you are between jobs, took a pay cut, or had a low-income year, your tax bracket is lower than usual — a good time to convert. You pay tax at a lower rate now and lock in tax-free growth for decades.

A conversion also makes sense if you want to reduce required minimum distributions (RMDs) later. Traditional IRAs force you to withdraw a percentage each year starting at age 73. A Roth IRA has no RMDs during your lifetime. If you convert now, you shrink your traditional IRA balance and reduce future RMDs.

Wait on a conversion if you are in a high tax bracket this year or expect your income to drop next year. Paying 37% federal tax on a conversion is expensive if you could pay 24% next year. Also wait if you do not have cash on hand to pay the tax bill — borrowing to pay conversion taxes defeats the purpose.

What happens after the conversion

Once the money is in your Roth IRA, it grows tax-free. You can withdraw the original amount you converted (called your basis) at any time without tax or penalty. You cannot withdraw the earnings on that money until you are 59½ and the account has been open at least five years.

If you convert multiple times over several years, each conversion has its own five-year clock. The first conversion must sit five years before you can withdraw its earnings; the second conversion has its own five-year window starting from when you did it.

You do not have to report the conversion on your tax return as a separate line item — it is included in your ordinary income for the year. Your 401k custodian will send you a Form 1099-R showing the conversion amount, and your Roth IRA custodian will send a Form 5498 showing the deposit. Your tax preparer uses these to calculate your tax bill.

Frequently Asked Questions

Can I convert if I am still working for the employer that sponsors the 401k?

Not usually. You can only convert a 401k after you leave the employer. Some plans allow in-service conversions while you are still employed, but this is uncommon. Check your plan documents or ask your HR department whether your plan allows it.

What if I do not have the cash to pay the tax bill?

Do not convert. Withdrawing from the conversion itself to pay taxes creates a cascade of additional taxable income and may trigger a 10% penalty if you are under 59½. Only convert if you can pay the tax from savings, current income, or other assets.

Does a Roth conversion count as income for Medicare or other benefits?

Yes. The conversion amount is added to your Modified Adjusted Gross Income (MAGI), which can affect your Medicare premiums, Social Security taxation, and other benefit calculations. If you are close to a threshold, a large conversion might push you into a higher bracket. Run the numbers with a tax preparer before converting.

Can I undo a conversion if I change my mind?

You used to be able to recharacterize a conversion (undo it and move the money back), but that option ended in 2018. Once you convert, the conversion is permanent. You still owe tax on it even if the money loses value afterward.

What is the difference between a Roth conversion and a backdoor Roth?

A backdoor Roth is a specific strategy where you contribute after-tax money to a traditional IRA, then immediately convert it to a Roth. It is used by high earners who cannot contribute directly to a Roth because their income is too high. A regular Roth conversion is moving pre-tax money from a 401k or traditional IRA to a Roth. Both trigger the pro-rata rule if you have other IRAs.