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 traditional 401(k) and deposit it into a Roth IRA. The IRS allows this move at any age, and you do not have to leave your job to do it. The catch is straightforward: you pay ordinary income tax on whatever amount you convert in that tax year, as if it were wages you earned.

The reason people do this is future tax-free growth. Once the money sits in the Roth IRA, it grows without tax, and you can withdraw it tax-free after age 59½ (and after the account has been open at least five years). If you expect your tax rate to be higher later, or if you want to leave tax-assistance programs to heirs, a conversion can make sense. If you convert when your income is low — say, between jobs — you may pay less tax than you would have eventually.

The process itself is straightforward: you contact your 401(k) plan administrator, request a distribution, and instruct them to send the money directly to a Roth IRA custodian (a bank or brokerage). If the money touches your hands first, you have 60 days to deposit it yourself, but that creates withholding complications and is riskier.

Key Takeaways

  • Converting a 401(k) to a Roth IRA triggers income tax on the full amount converted in that year, calculated at your ordinary income tax rate.
  • You can convert at any age and while still employed, but you cannot convert money that is currently borrowed against (an outstanding 401(k) loan blocks conversion of that portion).
  • The five-year rule means you must wait five years from the conversion date before withdrawing the converted amount tax-free, even if you are over 59½.
  • A direct trustee-to-trustee transfer avoids the 60-day rollover window and withholding taxes, making it the safest method.
  • Converting a large amount in one year can push you into a higher tax bracket and affect other tax benefits like the child tax credit or Medicare premiums.

How the tax bill works when you convert

The IRS treats a Roth conversion as taxable income in the year you make it. If you convert $50,000, you add $50,000 to your taxable income for that year. You pay tax at whatever rate applies to that income — if you are in the 22% bracket, you owe roughly $11,000 in federal tax (state tax may apply separately).

This is why timing matters. If you convert during a year when your income is unusually low — between jobs, after retirement, during a sabbatical — you may fall into a lower tax bracket and pay less. Conversely, converting in a high-income year can push you into a higher bracket and trigger other tax consequences, like higher Medicare premiums or loss of education credits.

You do not have to pay the tax from the converted money itself. Many people convert and then pay the tax bill from other savings or income. However, if you use money from the 401(k) to pay the tax, that additional withdrawal is also taxable, which compounds the bill.

The pro-rata rule and why it matters if you have other IRAs

If you have a traditional IRA or SEP IRA in addition to your 401(k), the IRS applies the pro-rata rule. This rule treats all your traditional IRAs and the 401(k) money as one pool for tax purposes. If 30% of that pool is pre-tax money and 70% is after-tax money, then 30% of any conversion is taxable.

This rule can create an unexpected tax bill. Suppose you have a $100,000 traditional IRA (all pre-tax) and you want to convert $20,000 from your 401(k) to a Roth. You might expect to pay tax only on the $20,000. Instead, the IRS sees $120,000 total, treats the $20,000 as 16.7% of the pool, and taxes you on that percentage of the conversion. The result is you pay tax on roughly $3,340 of the conversion, even though you only converted $20,000.

The workaround is to roll the traditional IRA into your 401(k) before converting. Not all 401(k) plans allow this, so check with your plan administrator first. If your plan does allow it, rolling the IRA in removes it from the pro-rata calculation, and your conversion is taxed only on the 401(k) money itself.

When you cannot convert, and what to do instead

You cannot convert money from a 401(k) if you have an outstanding loan against it. The IRS treats the borrowed portion as still belonging to you, and converting it would be a prohibited transaction. You must repay the loan first, or wait until it is repaid, before converting the remaining balance.

If you are still employed and your plan does not allow in-service conversions, you have to wait until you leave the job, retire, or reach age 59½ (some plans allow conversions at 59½ even while employed). Check your plan documents or ask your HR department what your plan permits.

If your 401(k) is with a former employer, you have more flexibility. Most plans allow you to roll the money into an IRA (traditional or Roth) after you leave. Rolling into a traditional IRA first, then converting to Roth, gives you the same result as a direct conversion but may be easier administratively.

The five-year rule and when you can withdraw converted money

After you convert, the IRS imposes a five-year holding period on the converted amount. You cannot withdraw it tax-free until five years have passed from January 1 of the year you converted, even if you are over 59½. If you withdraw before five years are up, the converted money is subject to a 10% early withdrawal penalty (though some exceptions exist, such as disability or medical expenses).

This rule applies separately to each conversion. If you convert in 2024, the five-year clock starts January 1, 2024. If you convert again in 2025, that second conversion has its own five-year clock starting January 1, 2025. You can withdraw the 2024 conversion tax-free starting January 1, 2029, while the 2025 conversion remains locked until January 1, 2030.

The five-year rule does not prevent you from withdrawing earnings (investment gains) on the converted money at any time — those earnings are always subject to tax and penalty if withdrawn before 59½. Only the principal (the amount you actually converted) is protected by the five-year rule.

Direct transfer versus 60-day rollover: which method to use

There are two ways to move the money: a direct trustee-to-trustee transfer or a 60-day rollover. A direct transfer is the simpler and safer route. You instruct your 401(k) plan to send the money directly to the Roth IRA custodian. No withholding occurs, no 60-day clock starts, and there is no risk of missing a deadline.

A 60-day rollover means the 401(k) plan sends you a check. You then deposit it into the Roth IRA within 60 days. The problem: the plan is required to withhold 20% for federal taxes. If you convert $50,000, you receive $40,000 and the plan withholds $10,000. If you deposit only the $40,000 you received, the IRS treats the $10,000 as a non-converted distribution, and you owe tax on it plus a 10% penalty. To avoid this, you must deposit the full $50,000 from your own funds within 60 days, then claim the $10,000 withholding as a credit when you file taxes.

Use the direct transfer method whenever possible. It avoids withholding, eliminates the 60-day deadline risk, and is faster. Ask your 401(k) administrator for the form to request a direct rollover to a Roth IRA.

What happens to employer match and company stock

If your 401(k) includes employer match contributions, those are pre-tax money and fully taxable when converted. You cannot separate them out or convert only your own contributions. The entire balance is treated as one pool.

If your 401(k) holds company stock with unrealized gains, converting it to a Roth locks in those gains as taxable income. However, there is a special rule called net unrealized appreciation (NUA) that may let you avoid this. Under NUA, you can take the company stock out of the 401(k) as a distribution (paying tax only on the cost basis, not the current value), then convert the remaining 401(k) balance to a Roth. The appreciation on the stock is taxed only when you eventually sell it, and if you hold it long-term, it qualifies for capital gains rates rather than ordinary income rates. This strategy is complex and requires careful timing, so consult a tax professional if your 401(k) holds significant company stock.

Frequently Asked Questions

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

No. You can convert part of your balance and leave the rest in the 401(k) or roll it into a traditional IRA. Each partial conversion is a separate taxable event, so you can spread conversions across multiple years to manage your tax bill. Some people convert a smaller amount each year to stay in a lower tax bracket.

What if I convert and then the market drops — can I undo it?

Yes, through a process called a recharacterization. You can move the converted money back to a traditional IRA (or 401(k)) before your tax return is due, including extensions. If the account has lost value, you can recharacterize and avoid paying tax on the loss. However, you cannot cherry-pick which investments to recharacterize — it is all or nothing for that conversion.

Will converting affect my Social Security or Medicare?

Roth conversions count as taxable income for the year you convert, which can affect Medicare premiums (higher income means higher Part B and Part D premiums) and potentially trigger taxation of Social Security benefits. If you are near retirement or already receiving benefits, model the conversion with a tax professional to see the full impact before you proceed.

Can I convert if I am still working and my 401(k) plan does not allow in-service conversions?

Not directly from the 401(k). However, if your plan allows it, you can roll the 401(k) into a traditional IRA, then convert the IRA to a Roth. Some employers also offer Roth 401(k) options, which let you contribute new money as Roth going forward without a conversion. Check with your HR or plan administrator about what your specific plan permits.

Is there an income limit for Roth conversions?

No. Unlike direct Roth IRA contributions, which have income limits, conversions are available to anyone regardless of how much you earn. This is why high-income earners often use conversions as a backdoor way to fund a Roth IRA when they exceed the income cap for direct contributions.