Converting a 401k to a Roth IRA means moving money from your employer plan into a Roth account you control, and paying income tax on the amount you move in that year

A conversion is not automatic. You initiate it by asking your 401k plan administrator to transfer funds directly to a Roth IRA you've opened at a bank or brokerage. The money moves tax-free between accounts, but the IRS treats the amount you convert as taxable income on your tax return that year. Whether this makes sense depends on your current tax bracket, when you plan to retire, and whether you expect to be in a higher or lower tax bracket later.

The core logic is simple: you pay taxes now at today's rate, and then all future growth and withdrawals come out tax-free. If you believe tax rates will be higher when you retire, or if you're in a lower tax bracket now than you expect to be later, a conversion can save you money over your lifetime. If you're in a high tax bracket now and expect to be in a lower one in retirement, converting usually costs you more than it saves.

Key Takeaways

  • Converting triggers a tax bill in the year you convert, calculated as ordinary income tax on the amount moved.
  • You must have earned income in the year you convert, and you cannot undo a conversion after 2017 (the rules changed permanently).
  • A conversion makes the most sense if you're in a lower tax bracket now than you expect to be in retirement, or if you have a temporary income dip.
  • If you have a large traditional IRA balance, converting a 401k can trigger the "pro-rata rule," which taxes a portion of all your traditional IRA money that year.
  • You pay the tax bill from money outside the Roth account — using Roth funds to pay taxes defeats the purpose and counts as a withdrawal.

How the tax bill works when you convert

When you convert $50,000 from a 401k to a Roth IRA, the IRS counts that $50,000 as taxable income on your tax return for that year. Your tax bill depends on your total income and your tax bracket. If you earn $75,000 and convert $50,000, your taxable income jumps to $125,000 for that year, and you pay tax on the full amount at whatever rate applies to that income level.

You must pay this tax from a source outside the Roth account — from your paycheck, a savings account, or another investment account. If you use money from the Roth IRA itself to pay the tax, the IRS treats that as a withdrawal, and you may owe a 10% early withdrawal penalty if you're under 59½. The tax is due when you file your return the following April, though you can make estimated tax payments during the year to avoid a large bill then.

The amount you convert is not subject to the 10% early withdrawal penalty, even if you're under 59½. The penalty applies only to earnings you withdraw from the Roth before age 59½ and before the account has been open five years. The converted amount itself can be withdrawn penalty-free at any time.

When a conversion usually makes financial sense

A conversion is most valuable when you're in a lower tax bracket now than you expect to be when you start taking retirement withdrawals. This happens most often in a year when your income drops — you lose a job, take unpaid leave, retire before Social Security starts, or have a business loss. If you convert during that low-income year, you pay tax at a lower rate than you would in a normal year.

A conversion also makes sense if you believe tax rates will rise in the future. Tax rates are set by Congress and can change. If you think rates will be higher in 10 or 20 years, paying tax now at today's rate locks in a lower cost. This is a prediction, not a certainty, and reasonable people disagree about future tax policy.

A conversion can also help if you want to leave money to heirs. Roth IRAs pass to beneficiaries tax-free, whereas traditional 401k and IRA withdrawals are taxable income to the person who inherits them. If you have substantial assets and plan to leave money behind, converting some to a Roth reduces the tax burden on your heirs.

When a conversion usually costs you money

If you're in a high tax bracket now and expect to be in a lower one in retirement, converting locks you into paying tax at a higher rate than you would pay later. For example, if you earn $250,000 this year and convert $100,000, you pay tax on $350,000 of income at your marginal rate — possibly 32% or higher depending on your filing status. If you wait until retirement and withdraw that same $100,000 when your income is lower, you might pay only 22% or 12% tax on it. The conversion costs you the difference.

A conversion also becomes expensive if you have a large balance in a traditional IRA. The IRS applies the pro-rata rule: if you own both traditional and Roth IRAs, a conversion is treated as if you're converting a proportional mix of pre-tax and after-tax money from all your traditional accounts combined. If you have $200,000 in a traditional IRA and $50,000 in after-tax contributions, and you convert $50,000 from your 401k, the IRS treats the conversion as 80% pre-tax money and 20% after-tax money. You pay tax on $40,000 of the conversion, not $50,000. This rule applies even if the traditional IRA and the 401k are at different institutions.

The mechanics of moving the money

First, open a Roth IRA at a bank, brokerage, or credit union if you don't already have one. Then contact your 401k plan administrator and request a direct rollover to your Roth IRA. Provide the administrator with the Roth IRA account number and routing information. The administrator transfers the funds directly to the Roth account — the money never passes through your hands.

Do not take a distribution check from your 401k and deposit it yourself. If the money comes to you, the plan withholds 20% for federal taxes automatically, and you have only 60 days to deposit the full amount (including the withheld portion) into a Roth IRA or the transaction fails. A direct rollover avoids this trap.

The conversion is complete when the money arrives in your Roth IRA. You report it on your tax return using Form 8606 (Nondeductible IRAs) or Form 1040 Schedule 1, depending on your situation. Your brokerage or bank will send you a Form 1099-R showing the conversion amount, which you use to fill out your return.

What happens to your 401k after you convert

Converting does not close your 401k. The money you convert leaves the plan, but any balance remaining stays in the 401k unless you also request a full distribution. You can convert part of your 401k balance and leave the rest in the plan, or convert the entire balance. Some people convert gradually over several years to spread the tax bill across multiple years and stay in a lower bracket each year.

If you leave your job, you have more options. You can roll the entire 401k balance into an IRA (traditional or Roth), leave it in your former employer's plan if the balance is large enough, or roll it into your new employer's plan if that plan accepts rollovers. A conversion is just one of these choices.

After you convert, the money in your Roth IRA grows tax-free. You can invest it in stocks, bonds, mutual funds, or other securities offered by your brokerage. You do not have to take withdrawals at any age, unlike traditional IRAs and 401ks, which require withdrawals starting at age 73 (as of 2023, under current law).

Income limits and other restrictions

There is no income limit on conversions themselves. Anyone can convert a 401k or traditional IRA to a Roth, regardless of how much they earn. However, you cannot convert if you have no earned income that year — the conversion must be reported as income on a tax return, and you must have a tax filing requirement.

You cannot undo a conversion after the tax year ends. Before 2018, you could reverse a conversion (called a "recharacterization") if the market dropped and you regretted the move. That option ended permanently in 2017. Once you convert, the money stays in the Roth and the tax bill stands.

If you're married and file separately, conversions are restricted. The rules are complex and depend on your specific situation, so consult a tax professional if this applies to you.

Frequently Asked Questions

Can I convert my 401k to a Roth if I'm still working at the company?

It depends on your plan. Some 401k plans allow in-service conversions while you're still employed, and others do not. Contact your plan administrator to ask whether your plan permits conversions. If it does not, you can convert after you leave the job or retire.

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

No. Conversions cannot be reversed after the tax year ends. If you convert $50,000 and the market drops to $40,000, you still owe tax on the full $50,000. This is why some people convert gradually or wait for market downturns to convert smaller amounts.

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

No. You can convert part of your balance and leave the rest in the 401k. Some people convert over multiple years to spread the tax bill and avoid jumping into a higher tax bracket in a single year. Each conversion is reported separately on your tax return.

Will a conversion affect my Social Security or Medicare premiums?

Yes, it can. A conversion increases your taxable income for that year, which can push you into a higher Medicare premium bracket or affect the taxation of your Social Security benefits. If you're close to these thresholds, consult a tax professional before converting.

What's the difference between a conversion and a rollover?

A rollover moves money from one retirement account to another of the same type (traditional to traditional, or Roth to Roth) without triggering a tax bill. A conversion moves money between different types (traditional to Roth) and creates a tax bill. Both use the same direct transfer mechanism, but the tax treatment is different.