How a 401(k)-to-Roth conversion works

A 401(k)-to-Roth conversion means moving money from your employer's 401(k) plan into a Roth IRA in your own name. The IRS allows this, but you pay income tax on the amount you convert in the year you move it. After that, the money grows tax-free in the Roth, and you can withdraw it tax-free in retirement if you follow the rules.

The conversion itself is straightforward: you instruct your 401(k) plan administrator to send the money to a Roth IRA you've opened, or you withdraw it yourself and deposit it into the Roth within 60 days. The hard part is the tax bill. If you convert $50,000, you owe federal income tax on that $50,000 in the year of conversion, calculated at your ordinary income tax rate.

You do not have to convert your entire 401(k) at once. You can convert part of it now and leave the rest in the 401(k), or convert in multiple years to spread the tax hit across different tax years.

Key Takeaways

  • You pay income tax on the full amount you convert in the year you convert it, so a large conversion can push you into a higher tax bracket.
  • After conversion, the money grows tax-free in the Roth and you can withdraw it tax-free in retirement, unlike a traditional 401(k).
  • You must have earned income in the year you convert, and you cannot convert if your modified adjusted gross income exceeds the Roth IRA income limit for that year.
  • If you have a traditional IRA, SEP IRA, or SIMPLE IRA, the "pro-rata rule" may force you to pay tax on a portion of your entire IRA balance, not just the amount you convert.
  • You can undo a conversion (called a recharacterization) only if you do it before the tax-filing deadline, and only once per year per IRA.

Who can convert a 401(k) to a Roth

You can convert a 401(k) to a Roth IRA if you have a 401(k) with money in it and you have earned income in the year of conversion. There is no age limit and no income limit for conversions themselves — the income limit applies only to direct contributions to a Roth, not to conversions.

However, if you also own a traditional IRA, SEP IRA, or SIMPLE IRA, the IRS applies the pro-rata rule. This rule says you cannot convert only the after-tax money in your IRAs; instead, you must treat all your traditional IRAs as one pool. If 80 percent of that pool is pre-tax money, then 80 percent of your conversion is taxable, even if you only converted after-tax money. This can make a conversion much more expensive than you expected.

You must also be able to leave your job or meet your plan's rules for in-service conversions. Some 401(k) plans allow you to convert while still employed; others require you to leave the company first. Check with your plan administrator before you start.

The tax bill: what you owe and when

The amount you convert becomes taxable income in the year of conversion. If you convert $40,000 and you normally earn $60,000, your taxable income for that year becomes $100,000. You pay federal income tax at your marginal rate (the rate for your highest income bracket), plus state income tax if your state has one.

The IRS does not withhold tax automatically on conversions. You can ask your 401(k) plan to withhold taxes from the conversion amount before sending it to the Roth, but most people pay the tax separately from their own funds. If you do not pay the tax by April 15 of the following year, you owe penalties and interest.

Some people convert in years when their income is lower than usual — for example, after leaving a job or during a sabbatical — to keep their tax bracket lower. Others convert small amounts over several years instead of one large conversion. There is no single right strategy; it depends on your income, your tax bracket, and your long-term plans.

Step-by-step conversion process

First, open a Roth IRA with a bank, brokerage, or investment firm if you do not already have one. You will need to provide your Social Security number, address, and employment information. This takes a few minutes online or by phone.

Second, contact your 401(k) plan administrator (usually your employer's benefits department or the plan's custodian) and ask how to convert. Some plans allow direct transfers, where the administrator sends the money straight to your Roth IRA custodian. Others require you to take a distribution check and deposit it yourself. Ask whether the plan will withhold taxes and how much.

Third, if you are doing a direct transfer, provide your Roth IRA custodian's name and account number to your 401(k) administrator. If you are taking a distribution check, deposit it into your Roth IRA within 60 days. If you miss the 60-day window, the IRS treats it as a withdrawal, not a conversion, and you may owe penalties.

Fourth, report the conversion on your tax return. You will receive a Form 1099-R from your 401(k) plan showing the amount distributed. Your Roth IRA custodian will send you a Form 5498 showing the amount received. You report both on your tax return and pay the tax owed.

The pro-rata rule and why it matters

If you have any traditional, SEP, or SIMPLE IRA accounts, the pro-rata rule applies to your conversion. The rule works like this: add up the total balance of all your traditional IRAs, SEP IRAs, and SIMPLE IRAs as of December 31 of the year you convert. Calculate what percentage is pre-tax money (contributions and earnings that were never taxed) and what percentage is after-tax money (contributions you already paid tax on).

When you convert, that same percentage applies to the conversion. If your IRAs are 90 percent pre-tax and 10 percent after-tax, then 90 percent of your conversion is taxable. You cannot cherry-pick only the after-tax portion.

Example: You have a traditional IRA with $100,000 (all pre-tax) and you want to convert $20,000 to a Roth. Because 100 percent of your IRA balance is pre-tax, 100 percent of the $20,000 conversion is taxable. You owe tax on the full $20,000. If you had a second IRA with $10,000 in after-tax contributions, your total IRA balance would be $110,000, of which $100,000 is pre-tax (91 percent). Then 91 percent of the $20,000 conversion ($18,200) would be taxable.

The pro-rata rule is one of the biggest surprises in conversions. If you have a large traditional IRA, converting a 401(k) may trigger a much larger tax bill than you expected. Some people roll their traditional IRA into their 401(k) first to remove it from the pro-rata calculation, then convert the 401(k). Check with a tax professional before you do this.

Undoing a conversion: recharacterization rules

If you convert and then the market drops, or you realize the tax bill is too high, you can undo the conversion. This is called a recharacterization. You instruct your Roth IRA custodian to move the money back to a traditional IRA (or back to your 401(k) if the plan allows it). The conversion is treated as if it never happened for tax purposes.

You can recharacterize only once per year per IRA, and you must do it by the tax-filing deadline for that year (usually April 15, plus extensions). If you converted on January 15, 2024, you have until April 15, 2025 (or October 15, 2025 if you file an extension) to recharacterize.

Recharacterization is useful if the market drops sharply after your conversion and you want to avoid paying tax on money that is now worth less. However, if you recharacterize and then convert again later in the same year, the second conversion counts as your one allowed recharacterization for that year.

Conversions and your retirement timeline

A key advantage of a Roth is that you can withdraw contributions (the money you put in) anytime, tax-free and penalty-free. Converted amounts are treated as contributions for this purpose. If you convert $30,000 and the account grows to $40,000, you can withdraw the $30,000 anytime without penalty, though you cannot withdraw the $10,000 in earnings until age 59½ without owing a 10 percent penalty (with some exceptions).

However, there is a five-year rule: you must wait five years from the year of conversion before you can withdraw the earnings tax-free. If you convert in 2024, you can withdraw earnings tax-free starting in 2029. This rule applies to each conversion separately, so if you convert again in 2025, that conversion has its own five-year clock.

If you are converting because you plan to retire soon and want tax-free withdrawals, make sure you understand the five-year rule and whether you will need to access the earnings before then.

Frequently Asked Questions

Can I convert a 401(k) after I leave my job?

Yes. After you leave your job, you can convert your 401(k) to a Roth IRA anytime. Some people wait until after they retire to do this, when their income may be lower and the tax bill smaller. You do not have to convert immediately; the money can stay in your old 401(k) until you are ready.

What happens if I cannot pay the tax bill?

You still owe the tax by April 15 of the following year. If you do not pay, the IRS charges penalties and interest. Some people use funds from outside the conversion to pay the tax, while others convert a smaller amount. You cannot use money from the Roth itself to pay the tax without triggering additional penalties.

Does a conversion affect my Social Security or Medicare?

A conversion increases your taxable income for that year, which can affect your Medicare premiums (higher income means higher premiums) and may cause some of your Social Security to become taxable. If you are close to retirement, talk to a tax professional before converting.

Can I convert a 401(k) loan?

No. A loan from your 401(k) is not part of your account balance and cannot be converted. If you have an outstanding loan and you leave your job, the loan usually must be repaid within 60 days or it is treated as a withdrawal, which may trigger taxes and penalties.

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

Some plans do not permit in-service conversions while you are still employed. In that case, you must wait until you leave the job or retire. Once you have separated from service, you can roll the 401(k) to an IRA and then convert. Check your plan documents or ask your benefits department about your plan's conversion rules.