A 401(k)-to-Roth conversion means moving retirement savings from your employer plan into a Roth IRA, but you will owe income tax on the amount you move in that tax year

When you roll over a traditional 401(k) to a Roth IRA, you are transferring money from a workplace retirement account into an individual retirement account you control. The mechanics are straightforward: your 401(k) custodian sends the money to your Roth IRA custodian, and the transfer itself is not taxed. The tax bill comes later, when you file your return for the year you did the conversion.

The tax you owe depends on whether the 401(k) money was ever taxed before. If you contributed to a traditional 401(k) with pre-tax dollars (the most common setup), the entire amount you move becomes taxable income in the year of the conversion. If your 401(k) contains after-tax contributions or employer match that was already taxed, only the untaxed portion triggers a tax bill. You will need to know your 401(k) balance breakdown before you start.

The conversion itself takes one to two weeks once you initiate it. The tax bill arrives when you file your return the following spring. Many people convert in December so they have time to plan for the tax payment, though you can convert any month of the year.

Key Takeaways

  • You can only roll a 401(k) to a Roth IRA after you leave the employer or reach age 59½, depending on your plan's rules.
  • The full amount of pre-tax 401(k) money you convert becomes taxable income in that year, which can push you into a higher tax bracket.
  • You must complete the conversion through a direct trustee-to-trustee transfer to avoid the 60-day rule and withholding penalties.
  • After the conversion, the money in your Roth IRA grows tax-free and you can withdraw it tax-free in retirement if you follow the five-year rule.

When you can roll over 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 still employed if your plan allows in-service conversions. Most plans permit conversions after you separate from the employer, regardless of your age. Some plans allow in-service conversions starting at age 59½, but this varies widely — you will need to check your plan documents or call your plan administrator to know whether yours does.

If you are still working and your plan does not allow in-service conversions, you have to wait until you leave the job. If you are retired or have already left, you can convert immediately. There is no age limit on conversions themselves, though if you are under 59½ and withdraw money from the Roth IRA within five years of the conversion, you may owe a 10 percent penalty on the converted amount (the five-year rule is separate from the income tax you already paid).

How to set up a direct trustee-to-trustee transfer

A direct transfer is the safest route because the money never touches your hands and you avoid the 60-day rollover rule. Contact your 401(k) custodian (usually your plan administrator or the brokerage holding the account) and ask for a direct rollover form to a Roth IRA. You will need to provide the name and address of the Roth IRA custodian you want the money sent to, plus your Roth IRA account number.

If you do not yet have a Roth IRA, open one first at any brokerage or bank that offers them — Vanguard, Fidelity, Charles Schwab, and most banks all offer Roth IRAs. Once your account is open and you have the account number, give that information to your 401(k) custodian. The transfer typically takes five to ten business days after the 401(k) custodian processes the request.

Do not take a check from your 401(k) and deposit it yourself. If the money is payable to you, your employer is required to withhold 20 percent for federal taxes, and you have only 60 days to deposit the full amount (including the withheld portion) into the Roth IRA or face penalties and taxes on the shortfall. A direct transfer avoids all of this.

Understanding the tax bill on your conversion

The amount you convert becomes ordinary income in the year you do the conversion. If you convert $50,000 from a traditional 401(k), you add $50,000 to your taxable income for that year. This can push you into a higher tax bracket and increase what you owe when you file your return.

Your tax bill depends on your total income that year and your tax bracket. Someone in the 22 percent bracket who converts $50,000 will owe roughly $11,000 in federal tax (the exact amount depends on state taxes and other income). Some people spread conversions over multiple years to keep each year's tax bill lower. Others do a large conversion in a year when their income is unusually low, such as the year they retire or take unpaid leave.

You do not have to pay the tax from the converted money itself. You can pay it from other savings or income. However, if you use money from the 401(k) to pay the tax bill, that additional withdrawal is also taxable and may trigger a 10 percent early withdrawal penalty if you are under 59½.

What happens after the conversion is complete

Once the money lands in your Roth IRA, it grows tax-free. You can withdraw the earnings tax-free in retirement if you have held the Roth IRA for at least five years and you are age 59½ or older, disabled, or using the money for a first-time home purchase (up to $10,000 lifetime). The five-year clock starts on January 1 of the year you made the conversion, not the date you converted.

You can withdraw the amount you converted (called the basis) at any time without penalty, even before age 59½. Only the earnings are subject to the age and five-year restrictions. This makes Roth conversions useful for people who want access to retirement savings before traditional retirement age.

After a conversion, you cannot undo it by recharacterizing it back to a traditional IRA. This rule changed in 2018. Once the money is in the Roth, it stays there unless you withdraw it.

Deciding whether a conversion makes sense for you

A conversion is most useful if you expect to be in a higher tax bracket in retirement than you are now, or if you want to reduce the size of your traditional retirement accounts to lower required minimum distributions later. It also makes sense if you have a year with unusually low income, such as a sabbatical or job transition, because the tax bill will be smaller.

A conversion is less useful if you are currently in a high tax bracket and will be in a lower one in retirement, because you are paying tax now at a high rate to avoid tax later at a lower rate. It is also less useful if you do not have money outside the 401(k) to pay the tax bill, because withdrawing from the 401(k) to cover the tax creates a larger taxable event.

There is no single right answer — it depends on your income, your tax bracket, how long you plan to hold the money, and whether you have other savings to cover the tax bill. Many people find it helpful to run the numbers with a tax professional before converting.

Common mistakes to avoid during a conversion

The most common mistake is taking a check from the 401(k) instead of doing a direct transfer. This triggers the 20 percent withholding and the 60-day rule, and most people end up owing penalties. Always request a direct trustee-to-trustee transfer.

Another mistake is not knowing your 401(k) balance breakdown. If your 401(k) contains both pre-tax and after-tax money, the IRS uses a formula called the pro-rata rule to calculate how much of the conversion is taxable. You cannot convert only the after-tax portion tax-free. Knowing your breakdown before you convert helps you plan the tax bill accurately.

A third mistake is converting too much in one year and not having money set aside to pay the tax bill. This forces you to withdraw more from the 401(k) to cover the tax, which creates a larger taxable event and may trigger penalties. Plan the tax payment before you convert.

Frequently Asked Questions

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

Only if your plan allows in-service conversions, which most do not. Check your plan documents or call your plan administrator. If your plan does not allow it, you must wait until you leave the job or reach age 59½ (if your plan permits conversions at that age).

What is the pro-rata rule and how does it affect my conversion?

If you have both pre-tax and after-tax money in any traditional IRA or 401(k), the IRS treats all your pre-tax accounts as one pool. When you convert, a percentage of the conversion is taxable based on the ratio of pre-tax to after-tax money across all your accounts. You cannot cherry-pick only the after-tax portion to convert tax-free.

Do I have to pay the tax bill immediately after I convert?

No. You owe the tax when you file your return the following spring. However, if you expect a large tax bill, you can make estimated tax payments during the year to avoid penalties. Your tax professional can tell you whether estimated payments make sense for your situation.

Can I undo a Roth conversion if I change my mind?

No. As of 2018, you cannot recharacterize a conversion back to a traditional IRA. Once the money is in the Roth, it stays there. You can withdraw it, but you cannot reverse the conversion itself.

What if my 401(k) plan is being terminated?

When a plan terminates, you must move the money somewhere — either to an IRA or to a new employer's plan if you have one. A conversion to a Roth IRA is one option, but you can also roll it to a traditional IRA to defer the tax bill. The plan administrator will tell you the deadline for moving the money.