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

A Roth conversion lets you take money from a 401(k) and deposit it into a Roth IRA. The IRS allows this, but treats the money you move as taxable income in the year you convert it. If you convert $50,000, you report that $50,000 as income on your tax return that year, and you pay tax on it at your regular rate. After that, the money grows tax-free in the Roth, and you can withdraw it tax-free in retirement.

The main reason people do this: a Roth IRA has no required withdrawals at age 73, while a 401(k) does. If you do not need the money immediately, a Roth gives you more control. But the tax bill upfront is real, and you have to have the cash to pay it — the IRS will not let you use the converted money itself to cover the tax.

Key Takeaways

  • Converting a 401(k) to a Roth IRA means you pay income tax on the full amount in the year you convert, at your regular tax rate.
  • You must have cash outside the 401(k) to pay the tax bill; you cannot use the converted money itself.
  • After conversion, the money grows tax-free in the Roth and you can withdraw it tax-free in retirement with no required withdrawals at age 73.
  • You can convert a traditional 401(k) or a SEP-IRA, but not a SIMPLE IRA until you have had it for at least two years.
  • If you have a traditional IRA with pre-tax money, converting triggers the pro-rata rule, which can increase your tax bill unexpectedly.

How the conversion process works step by step

First, you contact your 401(k) plan administrator — usually the company that holds your plan, like Fidelity, Vanguard, or your employer's benefits office. Tell them you want to do a Roth conversion. They will give you a form to sign and ask where you want the money sent.

You have two options for how the money moves. A direct rollover sends the money straight from your 401(k) custodian to your Roth IRA custodian without you touching it. A indirect rollover sends you a check, and you have 60 days to deposit it into a Roth IRA yourself. Direct is safer — if you miss the 60-day window on an indirect rollover, the IRS treats it as a withdrawal and you owe tax plus a 10 percent penalty if you are under 59½.

Once the money lands in your Roth IRA, the conversion is complete. You then report it on your tax return using Form 8606 when you file that year. The amount you converted becomes taxable income, and you pay tax on it at whatever rate applies to your total income for the year.

The tax bill: how much you will owe and when

The tax you owe depends on your total income that year and your tax bracket. If you convert $50,000 and you are in the 24 percent federal bracket, you owe $12,000 in federal tax alone. Some states also tax conversions, so your total could be higher. This is why most people convert in years when their income is lower — after retirement, between jobs, or in a year when they had a loss.

You pay the tax when you file your return the following spring, not when you do the conversion. But the IRS expects you to have the money ready. If you cannot pay the full amount by April 15, you can set up a payment plan with the IRS, but you will owe interest and penalties on any unpaid balance.

One common mistake: converting too much in one year and pushing yourself into a higher tax bracket. If you are close to a bracket edge, converting $30,000 instead of $50,000 might save you thousands in tax. A tax professional can model this for you before you convert.

The pro-rata rule: why having a traditional IRA complicates things

If you have a traditional IRA with pre-tax money in it, the pro-rata rule applies to any Roth conversion you do. This rule says the IRS treats all your traditional IRAs, SEP-IRAs, and SIMPLE IRAs as one pool for tax purposes. If 80 percent of that pool is pre-tax money, then 80 percent of any conversion is taxable, even if you are converting from a 401(k).

Example: You have a traditional IRA with $100,000 in pre-tax contributions and $20,000 in after-tax contributions. You also have a 401(k) with $50,000. You want to convert the 401(k) to a Roth. The pro-rata rule says 83 percent of the conversion ($41,500) is taxable because 83 percent of your total IRA pool is pre-tax money. You cannot avoid this by converting only the 401(k).

The way around this: move the traditional IRA money into your 401(k) if your plan allows it. Then when you convert the 401(k), the pro-rata rule does not apply because you no longer have a traditional IRA. Not all 401(k) plans allow this, so check with your plan administrator first.

Which retirement accounts you can and cannot convert

You can convert a traditional 401(k), a SEP-IRA, or a SIMPLE IRA (with limits). You cannot convert a Roth 401(k) because it is already tax-free. You also cannot convert a SIMPLE IRA until you have had it for at least two years — if you try before that, the IRS treats it as a taxable distribution plus a 25 percent penalty.

If you have a Roth 401(k) through your employer, you can roll it into a Roth IRA without a tax bill, because both are already after-tax. This is called a Roth-to-Roth rollover and is different from a conversion.

If you are still working and your employer offers a 401(k), you can only convert money that is already vested — money that belongs to you. Unvested money stays in the plan until you leave the job or it vests.

Timing: when to convert and what to watch for

The best time to convert is usually when your income is low. This might be the year you retire, the year between jobs, or a year when you had investment losses. Converting in a high-income year means a bigger tax bill, so most people avoid that.

You can do multiple conversions in the same year or spread them across different years. There is no limit on how many times you can convert, but each conversion is a separate taxable event. Some people convert $10,000 or $20,000 per year over several years to spread the tax bill and stay in a lower bracket.

One thing to know: if you convert and then the market drops, you can undo the conversion by October 15 of the following year using a process called a recharacterization. This lets you move the money back to the 401(k) and avoid the tax if the value has fallen. You cannot do this for gains, only for losses.

Who should and should not convert

A conversion makes sense if you expect to be in a higher tax bracket in retirement than you are now, or if you want to avoid required withdrawals at age 73. It also makes sense if you have a lot of money in a traditional 401(k) and want to leave a tax-free inheritance to your heirs.

A conversion does not make sense if you cannot afford the tax bill, if you are in a very high tax bracket now, or if you plan to use the money within a few years. The longer the money sits in the Roth untouched, the more the conversion pays off because of tax-free growth.

If you are under 59½ and convert, you can withdraw the amount you converted (not the earnings) without a penalty anytime. But if you withdraw the earnings before 59½, you owe a 10 percent penalty plus tax. This is why conversions work best for people who do not need the money right away.

Frequently Asked Questions

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

It depends on your plan. Some employer 401(k) plans allow in-service conversions while you are still employed. Others only allow conversions after you leave the job. Ask your plan administrator or benefits office whether your plan permits this.

What happens if I cannot pay the tax bill by April 15?

You can set up a payment plan with the IRS, but you will owe interest and penalties on the unpaid balance. It is better to convert a smaller amount or wait until a year when your income is lower so the tax bill is manageable.

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

No. You can convert part of your 401(k) and leave the rest in the plan. Many people do partial conversions over several years to keep their tax bill lower each year and avoid jumping into a higher bracket.

What is the difference between a conversion and a rollover?

A rollover moves money from one retirement account to another of the same type (traditional to traditional, or Roth to Roth) with no tax. A conversion moves money from a pre-tax account to a Roth and triggers a tax bill on the amount converted.

Can I undo a conversion if the market drops?

Yes, through a recharacterization. You have until October 15 of the year after the conversion to move the money back to the 401(k) and avoid the tax. This only works if the value has dropped; you cannot undo a conversion to avoid tax on gains.