Moving Money From Your 401k to a Roth IRA: What Happens and What It Costs

Yes, you can move a 401k to a Roth IRA, but you will owe income tax on the amount you convert

A rollover from a 401k to a Roth IRA is allowed under federal tax law, but it works differently than rolling into a traditional IRA. When you move pre-tax money from a 401k into a Roth IRA, the IRS treats that conversion as taxable income in the year you do it. You pay ordinary income tax on the full amount converted — not later, but on that year's tax return. This is the main cost of the move, and it is why most people do a rollover only when they expect to be in a lower tax bracket than they will be later.

The process itself is straightforward: your 401k plan administrator transfers the money directly to the Roth IRA custodian (usually a bank or brokerage). You do not touch the money, so there is no 20 percent withholding penalty that would apply if you took a check yourself. The transfer takes one to two weeks. After that, the money sits in your Roth IRA under Roth rules — no required withdrawals during your lifetime, tax-free growth, and tax-free withdrawals in retirement if you follow the rules.

Key Takeaways

You owe federal income tax on the full amount you convert from a 401k to a Roth IRA in the year of the conversion, calculated at your ordinary income tax rate.
A direct rollover (401k administrator to Roth custodian) avoids the 20 percent withholding that applies if you take the money yourself.
You can do a partial rollover — convert only part of your 401k balance and leave the rest where it is or roll it to a traditional IRA.
If you have other traditional IRAs, SEP IRAs, or SIMPLE IRAs, the IRS counts all of them together when calculating how much of your conversion is taxable (the pro-rata rule).
You cannot undo a Roth conversion after the tax year ends, so confirm the tax bill before you commit.

How the tax bill is calculated

The amount you owe in tax depends on your total income for that year and your tax bracket. If you convert $50,000 from a 401k to a Roth IRA, that $50,000 is added to your other income (wages, interest, capital gains, etc.) and taxed at whatever rate applies to that combined total. If you are in the 24 percent federal bracket, you will owe roughly $12,000 in federal tax on a $50,000 conversion. State income tax may apply as well, depending on where you live.

The pro-rata rule complicates this for some people. If you have a traditional IRA, SEP IRA, or SIMPLE IRA in addition to your 401k, the IRS treats all of them as one pool for conversion purposes. If 30 percent of that pool is pre-tax money and 70 percent is after-tax contributions, then 30 percent of your conversion is taxable and 70 percent is not. This rule applies even if you are converting only from the 401k. Many people discover this rule too late and end up with a larger tax bill than they expected.

When a rollover makes sense

A Roth conversion is most useful when 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 year with unusually low income, converting in that year means paying tax at a lower rate than you might pay later. Early retirees sometimes convert in the years before they claim Social Security or start required withdrawals from other accounts, when their income is temporarily low.

A conversion also makes sense if you want to leave money to heirs. Roth IRAs have no required withdrawals during your lifetime, so the account can grow for decades. Your heirs inherit it tax-free (though they do have to withdraw it within ten years under current law). A traditional 401k or IRA, by contrast, requires your heirs to pay income tax on withdrawals.

Conversions are less useful if you are in a high tax bracket now and expect to be in a lower one in retirement, or if you need the money soon — Roth IRA withdrawals of converted money are subject to a five-year holding period before you can take them out penalty-free, even if you are over 59½.

The direct rollover process

Contact your 401k plan administrator and ask for a direct rollover form to a Roth IRA. Provide the name and address of the Roth IRA custodian (your bank or brokerage) and your account number there. The administrator will send the check directly to the custodian, not to you. This step is important: if the check comes to you, the IRS withholds 20 percent automatically, and you have only 60 days to deposit the full amount (including the withheld portion) into the Roth IRA or face penalties and taxes on the shortfall.

The custodian receives the money and deposits it into your Roth IRA. This takes one to two weeks. You will receive a confirmation letter and a 1099-R tax form in January showing the conversion amount. You report this on your tax return when you file.

If you do not yet have a Roth IRA, open one before you request the rollover. Most banks and brokerages (Fidelity, Vanguard, Charles Schwab, your local credit union) offer them. Opening takes 10 to 15 minutes online. You will need your Social Security number, address, and employment information.

Partial rollovers and leaving money behind

You do not have to convert your entire 401k balance. You can roll over $30,000 and leave $70,000 in the 401k, or convert to a traditional IRA instead. This flexibility is useful if you want to spread the tax bill across multiple years — convert $20,000 this year, $20,000 next year, and so on — or if you want to keep some money in the 401k for other reasons (lower fees, employer stock options, or access to loans).

If you leave money in the 401k, it stays under 401k rules: required withdrawals start at age 73, and withdrawals are taxed as ordinary income. Money you roll to a Roth IRA follows Roth rules instead. You can also roll part of the 401k to a traditional IRA (which defers the tax bill) and part to a Roth IRA (which triggers tax now). The choice is yours.

The pro-rata rule and why it matters

If you have contributed after-tax money to a traditional IRA or 401k at any point, or if you have a SEP IRA or SIMPLE IRA, the pro-rata rule applies to your conversion. The rule says: the IRS looks at all your traditional, SEP, and SIMPLE IRAs combined (but not your 401k) and calculates what percentage is pre-tax and what percentage is after-tax. That same percentage applies to your Roth conversion.

Example: You have a traditional IRA with $100,000 (all pre-tax) and you want to convert $50,000 of your 401k to a Roth IRA. The pro-rata rule treats your traditional IRA and the 401k conversion as one pool. Of the $150,000 total, $100,000 is pre-tax and $50,000 is pre-tax (from the 401k). So 100 percent of your $50,000 conversion is taxable. But if your traditional IRA had $50,000 pre-tax and $50,000 after-tax, then only 50 percent of your $50,000 conversion would be taxable — $25,000.

The pro-rata rule does not apply to 401k-to-401k rollovers or to rollovers within the same plan. It also does not apply if you have no other IRAs. If you do have other IRAs and want to avoid the pro-rata rule, you can roll those IRAs into your current 401k (if the plan allows it) before you convert. This removes them from the pro-rata calculation.

What you cannot do after the conversion

Once the money is in the Roth IRA and the tax year ends, you cannot undo the conversion or recharacterize it back to a traditional IRA. This rule changed in 2018. Before that, you could convert, see how the market moved, and change your mind. Now you are locked in. If the market drops after your conversion and you regret the decision, you cannot reverse it for tax purposes.

You can, however, move the money to a different Roth IRA custodian if you want to change providers. You can also withdraw the converted amount within 60 days if you discover a mistake (like a calculation error), but this is rare and must be done quickly.

Frequently Asked Questions

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

No. You can convert part of your 401k balance to a Roth IRA and leave the rest in the 401k or roll it to a traditional IRA. This lets you spread the tax bill across multiple years if you want to stay in a lower bracket.

What if I cannot afford the tax bill?

You will need to pay the tax from other money — not from the IRA itself. If you use IRA money to pay the tax, the IRS treats it as an early withdrawal and you may owe a 10 percent penalty plus income tax on that amount. Plan the conversion so the tax bill fits your budget.

Can I convert my 401k to a Roth IRA if I am still working?

Yes, if your plan allows in-service conversions. Not all 401k plans permit this, so check with your plan administrator. If your plan does not allow it, you can convert after you leave the job or retire.

What happens to my 401k loan if I convert?

If you have an outstanding loan against your 401k, you cannot convert that portion. You must repay the loan first or leave that money in the 401k. Only the unlocked balance can be rolled over.

Does a Roth conversion affect my Social Security benefits?

A Roth conversion counts as income in the year you do it, which can affect your tax return and potentially your Medicare premiums. It does not directly affect Social Security benefits, but the extra income may trigger taxes on your benefits if you claim them in the same year.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.