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

A 401(k)-to-Roth conversion means taking money out of your 401(k) and depositing it into a Roth IRA. The IRS allows this, but treats the money you move as taxable income in the year you convert it. That means if you convert $50,000, you will owe federal income tax on $50,000 of additional income that year — the amount depends on your tax bracket. You do not have to convert your entire 401(k); you can convert part of it and leave the rest where it is.

The main reason people do this is to lock in lower tax rates now and avoid larger tax bills later. Once money is in a Roth IRA, it grows tax-free and you never pay tax on withdrawals in retirement. With a traditional 401(k), you will owe tax on every dollar you withdraw after age 59½. If you expect your tax rate to be higher in retirement, a conversion can save you money over time.

Key Takeaways

  • You can convert all or part of your 401(k) to a Roth IRA, but the amount you convert counts as taxable income that year.
  • You must pay the income tax from other money — if you use 401(k) funds to pay the tax bill, that amount is also taxable.
  • You can only convert from a 401(k) you no longer contribute to, or from certain employer plans that allow in-service conversions.
  • After conversion, the money sits in your Roth IRA and follows Roth withdrawal rules, including a five-year holding period before you can withdraw earnings tax-free.

When you can convert a 401(k) to a Roth IRA

You can convert a 401(k) to a Roth IRA in two situations: after you leave your job, or while you are still employed if your plan allows it.

If you have left your job, you can convert your old 401(k) anytime. This is the most common path. You contact your former employer's plan administrator or the custodian holding the 401(k) and request a direct transfer to a Roth IRA. The money moves from one account to another without touching your hands.

If you are still working, some employers allow in-service conversions, meaning you can convert part of your 401(k) while still employed there. Not all plans offer this — you need to check your plan documents or ask your HR or benefits department. If your plan does allow it, you can convert without leaving your job, though you will still owe tax on the amount converted.

The tax bill you will owe

When you convert, the IRS counts the money as ordinary income. If you convert $40,000, your taxable income rises by $40,000 that year. Your tax bill depends on your tax bracket — if you are in the 24% bracket, you owe roughly $9,600 in federal tax on a $40,000 conversion. State income tax may apply too, depending on where you live.

You must pay this tax from money outside the 401(k). If you use 401(k) funds to pay the tax bill, that withdrawal is also taxable, and you may owe a 10% early withdrawal penalty if you are under 59½. This defeats the purpose of the conversion. The best approach is to pay the tax from your paycheck, savings, or other non-retirement money.

One exception: if your 401(k) holds both pre-tax and after-tax contributions, the conversion is more complex. The IRS has a rule called the pro-rata rule that requires you to convert a proportional mix of pre-tax and after-tax money, even if you want to convert only the after-tax portion. A tax professional can help you navigate this.

How to actually move the money

The process has three main steps. First, open a Roth IRA if you do not already have one. You can open one at any bank, brokerage, or investment firm — Vanguard, Fidelity, and Schwab are common choices, but there are many others. You do not need your employer's permission.

Second, contact your 401(k) plan administrator or the custodian holding your account and request a direct transfer (also called a trustee-to-trustee transfer) to your new Roth IRA. Provide them with the Roth IRA account details. A direct transfer is the cleanest method because the money never enters your bank account, so there is no risk of missing a 60-day deadline or withholding complications.

Third, report the conversion on your tax return. You will receive a Form 1099-R from the 401(k) custodian showing the amount converted. You report this on Form 8606 (Nondeductible IRAs) when you file taxes. Your tax preparer or tax software will walk you through this.

What happens after the conversion

Once the money lands in your Roth IRA, it follows Roth rules. You can withdraw contributions (the money you put in) anytime without tax or penalty. But earnings (the growth on that money) are subject to a five-year holding period. You must have owned a Roth IRA for at least five tax years before you can withdraw earnings tax-free, even if you are over 59½.

If you withdraw earnings before five years have passed and before age 59½, you will owe income tax on the earnings plus a 10% penalty. There are a few exceptions — death, disability, and first-time home purchase (up to $10,000 lifetime) — but they are narrow.

The five-year clock starts on January 1 of the year you make your first Roth conversion, not the year you open the account. If you convert in 2024, the five-year period ends on January 1, 2029, regardless of when during 2024 you converted.

Reasons people convert and reasons they do not

People convert when they expect to be in a higher tax bracket in retirement than they are now. If you are between jobs, took a pay cut, or had a low-income year, your tax rate is temporarily low — that is a good time to convert. You lock in that low rate and pay tax now instead of later at a higher rate.

People also convert to reduce required minimum distributions (RMDs). Traditional 401(k)s and IRAs force you to withdraw a set amount each year after age 73. Roth IRAs have no RMD during your lifetime. If you convert to a Roth, you reduce the balance in your traditional accounts and lower future RMDs.

People avoid converting when they are in a high tax bracket now, when they expect to be in a lower bracket in retirement, or when they do not have cash outside the 401(k) to pay the tax bill. Converting also increases your income that year, which can affect Medicare premiums, tax credits, or other benefits that phase out at higher incomes.

Frequently Asked Questions

Do I have to convert my entire 401(k)?

No. You can convert part of it and leave the rest in the 401(k) or roll it to a traditional IRA. This is useful if you want to spread the tax bill across multiple years — you could convert $20,000 this year and $20,000 next year instead of $40,000 all at once.

What if I already have a traditional IRA?

You can still convert your 401(k) to a Roth IRA. However, if you have money in a traditional IRA, the pro-rata rule applies to your conversion. The IRS treats all your traditional IRAs and SEP IRAs as one pool for tax purposes, so you cannot avoid tax by converting only the 401(k).

Can I undo a conversion if I change my mind?

Not anymore. Before 2018, you could reverse a conversion (called a recharacterization). That option ended. Once you convert, the money stays in the Roth IRA and you owe the tax.

Will a conversion affect my Social Security or Medicare?

Yes, possibly. The conversion increases your income that year, which can raise your Medicare premiums and affect whether you pay tax on Social Security benefits. If you are close to income thresholds for these programs, talk to a tax professional before converting.

What if my 401(k) has employer stock in it?

You can convert employer stock to a Roth IRA, but the conversion value is based on the stock price on the conversion date. You will owe tax on that full value. Some people use a strategy called net unrealized appreciation (NUA) instead, which can be more tax-efficient, but it is complex and requires professional guidance.