Yes, you can convert a 401(k) to a Roth IRA, but you will owe income tax on the money 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 treats the money you convert as taxable income in the year you do it. If you convert $50,000, you will owe federal income tax on that $50,000 as if you earned it that year — on top of whatever else you earned. You do not have to convert all your 401(k) money at once; you can convert part of it and leave the rest where it is.

The main reason people do this is to lock in a lower tax rate now and avoid larger tax bills later. Once money is in a Roth IRA, you never pay tax on the growth or the withdrawals in retirement. A 401(k), by contrast, taxes you on every dollar you take out after age 59½. If you expect to be in a higher tax bracket later, or if you want to leave tax-assistance programs to your heirs, a conversion can make sense.

Key Takeaways

  • You owe federal income tax on the full amount you convert in the year you convert it, calculated at your regular income tax rate.
  • You can convert a 401(k) to a Roth IRA at any age and at any income level — there are no income limits on conversions, unlike direct Roth contributions.
  • If your 401(k) holds both pre-tax and after-tax money, the IRS requires you to convert a proportional mix of both, not just the after-tax portion.
  • You must complete the conversion by December 31 of the year you want the tax to apply; conversions done in January apply to that year's taxes.
  • Once money lands in the Roth IRA, you can withdraw contributions (but not earnings) without penalty at any time, though earnings are locked until age 59½.

How the conversion process actually works

You start by contacting your 401(k) plan administrator — usually the benefits department at your employer, or the third-party company that manages the plan. Tell them you want to do a Roth conversion and ask for the conversion form. Some plans call this a "distribution request" or "rollover request." You will need to specify the dollar amount you want to convert.

The plan administrator will send the money directly to your Roth IRA custodian (the bank or brokerage holding your Roth account). This is called a direct rollover, and it is the cleanest route because the money never touches your hands and there is no withholding. If the money goes to you first instead of directly to the IRA, your plan administrator must withhold 20 percent for federal taxes, and you will have to make up that 20 percent out of pocket to avoid penalties — so avoid this path if you can.

The entire transfer usually takes one to three weeks. Once the money lands in your Roth IRA, the conversion is complete. You will receive a Form 1099-R from both your 401(k) plan and your Roth IRA custodian showing the conversion amount. You report this on your tax return when you file.

The tax bill you will owe

The amount of tax you owe depends on your total income for the year and your tax bracket. If you convert $50,000 and you are in the 22 percent federal tax bracket, you will owe roughly $11,000 in federal tax (plus any state income tax, if your state has one). This is in addition to any tax you already owe on your regular income.

The conversion amount is added to your other income for the year, which can push you into a higher tax bracket. For example, if you earn $70,000 and convert $50,000, the IRS treats you as having $120,000 in income that year. This can also affect other tax benefits you claim, such as education credits or the child tax credit, because those phase out at higher income levels.

You can pay the tax bill from your regular income, or you can ask the IRS to withhold it from the conversion itself — though withholding reduces the amount that actually lands in your Roth. Most people pay the tax separately so the full conversion amount goes into the account. You do not have to pay the tax immediately; you pay it when you file your tax return the following spring.

The pro-rata rule and why it matters if you have multiple 401(k)s

If your 401(k) contains both pre-tax money (contributions you deducted from your income) and after-tax money (contributions you already paid tax on), the IRS requires you to convert them proportionally. You cannot cherry-pick just the after-tax portion to convert and leave the pre-tax money behind.

Here is an example: suppose your 401(k) holds $100,000 total — $80,000 pre-tax and $20,000 after-tax. If you want to convert $30,000, the IRS requires that $24,000 of it be pre-tax (80 percent) and $6,000 be after-tax (20 percent). You will owe tax on the $24,000 pre-tax portion, but not on the $6,000 after-tax portion, because you already paid tax on that money.

This rule applies across all your 401(k)s and similar plans combined. If you have a 401(k) at a current employer and an old 401(k) at a former employer, the IRS counts the pre-tax and after-tax balances in both when calculating the proportion. One way around this is to roll the pre-tax money from your old 401(k) into your current employer's 401(k) first, then convert only the after-tax portion — but your current plan must allow this, and not all do.

When a conversion makes financial sense

A conversion is usually worth considering if you are in a lower tax bracket now than you expect to be in retirement. This happens if you take a year off work, leave your job before age 59½, or retire early before you start taking Social Security and required minimum distributions. It also makes sense if you expect tax rates to rise in the future, or if you want to leave tax-assistance programs to heirs.

A conversion can also help if you have a large 401(k) and want to reduce the required minimum distributions you will have to take starting at age 73. Roth IRAs have no required distributions during your lifetime, so converting some money to a Roth lowers the balance subject to those rules.

Conversions generally do not make sense if you are in a high tax bracket now and expect to be in a lower one in retirement, because you will pay more tax today than you would by waiting. They also do not make sense if you cannot afford to pay the tax bill out of other money — taking a distribution from the 401(k) itself to cover the tax defeats the purpose.

What happens to your 401(k) after the conversion

The money you convert leaves your 401(k) and goes into your Roth IRA. The balance in your 401(k) drops by that amount. If you still work for the employer that sponsors the 401(k), you can usually keep the remaining balance in the plan and continue contributing to it. If you have left the employer, you can leave the money in the old 401(k), roll it to an IRA, or convert more of it to a Roth later.

You can do multiple conversions over several years if you want to spread out the tax bill. For example, you could convert $20,000 one year, $20,000 the next year, and so on. Each conversion is taxed separately in the year it happens, so you can time them to years when your income is lower.

Frequently Asked Questions

Can I undo a conversion if I change my mind?

Yes, but only within a limited window. You can request a recharacterization to move the money back to your 401(k) or to a traditional IRA, but you must do this by October 15 of the year after the conversion. After that deadline, the conversion is permanent and you cannot reverse it, even if the market drops and the conversion looks like a bad decision in hindsight.

Do I have to be employed to do a conversion?

No. You can convert a 401(k) to a Roth IRA whether you are still working, retired, or between jobs. You do not need earned income in the year of the conversion. The only requirement is that you have a 401(k) with money in it and a Roth IRA to receive the money.

What if my employer's 401(k) plan does not allow conversions?

Some plans do not permit in-service conversions while you are still employed. In that case, you can roll the money to a traditional IRA first, then convert the IRA to a Roth. Once you leave the employer, you can convert the old 401(k) directly. Check your plan documents or ask your benefits administrator whether conversions are allowed.

Will a conversion affect my Social Security benefits or Medicare premiums?

Yes, potentially. The conversion amount counts as income for the year, which can increase your Medicare premiums if you are on Medicare. It can also affect the taxation of your Social Security benefits if you are receiving them. Plan conversions carefully if you are near retirement age and already receiving these benefits.

Can I convert a 401(k) loan to a Roth IRA?

No. You can only convert actual 401(k) balances, not loans. If you have borrowed from your 401(k), that borrowed money stays in the plan as a loan. You can convert the rest of your balance, but the loan portion must be repaid according to the loan terms.