Yes, you can convert a 401(k) to a Roth IRA, but the rules depend on whether you still work for the employer and what type of 401(k) you have

A conversion means moving money from your 401(k) into a Roth IRA. The IRS allows this, but you pay income tax on the amount you convert in the year you move it. The conversion itself is not a withdrawal — you are not taking the money out and spending it. Instead, you are moving it from one retirement account to another, and the IRS taxes that move as if it were income.

Whether you can convert depends on your situation. If you have left your job, you can convert at almost any time. If you still work for the employer that sponsors your 401(k), you may be able to convert only if your plan allows it — not all plans do. Some employers let current employees convert, and some do not. You need to check your plan documents or call your plan administrator to find out.

The main reason people convert is that Roth IRAs have no required withdrawals during your lifetime, and withdrawals in retirement are tax-free. A traditional 401(k) requires you to start taking money out at age 73, and those withdrawals are taxed as income. If you think you will be in a higher tax bracket later, converting now at a lower rate can save you money over time.

Key Takeaways

  • You can convert a 401(k) to a Roth IRA after you leave your job, or while still employed if your plan allows it.
  • You owe income tax on the full amount you convert in the year you convert it, calculated at your ordinary tax rate.
  • A Roth conversion is different from a rollover — a rollover moves money to a traditional IRA and is not taxed, while a conversion moves money to a Roth IRA and is taxed.
  • You must have earned income in the year you convert, and you cannot convert more than you have in your 401(k).
  • After conversion, the money in your Roth IRA grows tax-free and you can withdraw it tax-free in retirement.

When you can convert: still employed versus retired

If you have left your job, you can convert your 401(k) to a Roth IRA whenever you want. There is no waiting period. You contact your 401(k) plan administrator or the financial institution that holds your account, tell them you want to convert to a Roth IRA, and provide the Roth IRA account details. The money moves directly from the 401(k) to the Roth IRA. This is called a direct conversion and is the cleanest way to do it.

If you still work for the employer, the rules are stricter. Your 401(k) plan document controls whether you can convert. Some plans allow in-service conversions, which means you can convert while still employed. Others do not. You have to read your plan document or call your HR department and ask: "Does our 401(k) plan allow in-service Roth conversions?" If the answer is no, you cannot convert until you leave the job. If the answer is yes, you can proceed.

There is one exception: if you are age 59½ or older and your plan allows it, you may be able to convert even if your plan does not normally allow in-service conversions. This is called a may have access to distribution conversion. Again, you have to check your specific plan.

How the tax bill works when you convert

When you convert, the IRS treats the money as if you received it as income that year. You owe federal income tax on the full amount at your ordinary tax rate — the same rate you pay on wages or salary. If you convert $50,000, you add $50,000 to your taxable income for that year.

Your tax bracket determines how much you owe. If you are in the 22% federal tax bracket, converting $50,000 means you owe roughly $11,000 in federal tax. You also owe state income tax in most states, which varies by state. Some states do not tax retirement income, so you would owe nothing to the state. Others tax it like regular income. You need to check your state's rules or talk to a tax professional.

You do not have to pay the tax from the conversion itself. You can pay it from other money — a savings account, a paycheck, or anywhere else. Many people do this because if you use money from the 401(k) to pay the tax, that money counts as a withdrawal and is also taxed. This can create a much larger tax bill.

The IRS does not withhold tax automatically on conversions the way it does on regular 401(k) withdrawals. You are responsible for paying the tax when you file your return, or you can make quarterly estimated tax payments if the amount is large.

Conversion versus rollover: what is the difference

A rollover moves money from a 401(k) to a traditional IRA. It is not taxed. You do not owe any income tax on the money that moves. A conversion moves money from a 401(k) to a Roth IRA, and you owe income tax on the full amount.

The reason for the difference is the account type. A traditional IRA is tax-deferred, just like a 401(k) — you do not pay tax until you withdraw in retirement. A Roth IRA is tax-free — you pay tax going in, but withdrawals are never taxed again. When you convert, you are switching from tax-deferred to tax-free, so the IRS collects the deferred tax when ready.

If you want to move your 401(k) and avoid a big tax bill, a rollover to a traditional IRA is the way to do it. If you want to move your 401(k) and are willing to pay tax now in exchange for tax-free growth and withdrawals later, a conversion to a Roth IRA is the way to do it. Both are allowed. The choice depends on your tax situation and your goals.

Income limits and the pro-rata rule

There is no income limit on Roth conversions themselves. Anyone can convert a 401(k) to a Roth IRA, no matter how much money they earn. This is different from regular Roth IRA contributions, which have income limits.

However, if you have a traditional IRA with pre-tax money in it, the pro-rata rule applies. This rule says that when you convert, the IRS treats all your traditional IRAs as one big pot. If 80% of that pot is pre-tax money and 20% is after-tax money, then 80% of your conversion is taxed and 20% is not. This can create an unexpected tax bill if you have both pre-tax and after-tax money in traditional IRAs.

The pro-rata rule does not explore to 401(k)s — only to IRAs. So if you have a 401(k) and a traditional IRA, and you convert the 401(k), the rule applies to the IRA portion of your total. This is why some people roll their 401(k) into a 401(k) at their new employer instead of into an IRA — to keep the 401(k) separate and avoid the pro-rata rule. You should talk to a tax professional if you have both a 401(k) and a traditional IRA and are thinking about converting.

The steps to convert your 401(k)

First, contact your 401(k) plan administrator or the financial institution that holds your account. Ask them for the conversion process. They will tell you whether you need to fill out a form, what information they need, and how long it takes. Most conversions take one to two weeks to complete.

Second, open a Roth IRA if you do not already have one. You can open one at a bank, a brokerage, or a mutual fund company. There is no cost to open an account. You will need to provide your name, address, Social Security number, and employment information.

Third, provide your Roth IRA account details to your 401(k) plan administrator. They will arrange for the money to move directly from your 401(k) to your Roth IRA. This is the direct conversion method and is the safest way because the money never touches your hands.

Fourth, keep all paperwork. Your 401(k) plan will send you a confirmation that the conversion happened. Your Roth IRA provider will send you a statement showing the deposit. Save these documents. You will need them when you file your tax return to report the conversion.

What happens to your money after conversion

Once the money is in your Roth IRA, it grows tax-free. Any earnings — interest, dividends, capital gains — are not taxed while the money is in the account. When you withdraw in retirement, you pay no tax on the growth or the original conversion amount.

You can withdraw the money you converted anytime after five years without penalty, as long as you are age 59½ or older. If you withdraw before five years have passed, you owe a 10% penalty on the conversion amount, plus income tax. The five-year rule is per Roth IRA, not per conversion, so if you have multiple Roth IRAs, the clock starts on the first one you opened.

You do not have to take withdrawals from a Roth IRA during your lifetime. This is one of the main advantages over a traditional 401(k), which requires withdrawals starting at age 73. If you do not need the money, you can leave it in the account to grow, and your heirs can inherit it tax-free.

Common mistakes to avoid

One mistake is using 401(k) money to pay the conversion tax. If you withdraw $50,000 to convert and another $11,000 to pay the tax, you owe tax on both amounts. The second withdrawal is treated as a regular withdrawal, not a conversion, and you may owe a 10% early withdrawal penalty if you are under 59½. Instead, pay the tax from savings or a paycheck.

Another mistake is not checking whether your plan allows in-service conversions if you are still employed. If you assume you can convert and your plan does not allow it, you will waste time and may face penalties if you try to move the money without permission. Always check first.

A third mistake is forgetting about the pro-rata rule if you have a traditional IRA. If you have $100,000 in a traditional IRA with $80,000 pre-tax and $20,000 after-tax, and you convert $50,000 from your 401(k), the IRS will tax $40,000 of the conversion (80% of $50,000) and not tax $10,000 (20% of $50,000). Many people do not expect this and end up with a larger tax bill than planned.

Frequently Asked Questions

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

Only if your 401(k) plan allows in-service conversions. Not all plans do. Contact your HR department or plan administrator and ask whether your specific plan permits Roth conversions for current employees. If it does, you can convert. If it does not, you must wait until you leave the job.

What if I cannot afford to pay the tax on the conversion?

You do not have to convert. A conversion is optional. If the tax bill is too large, you can do a rollover to a traditional IRA instead, which has no tax. Or you can convert a smaller amount to spread the tax bill across multiple years. Talk to a tax professional about what makes sense for your situation.

Can I undo a conversion if I change my mind?

You can reverse a conversion by doing a recharacterization, but only within certain time limits and under specific rules. The rules changed in 2018, and now recharacterizations are more limited. You should talk to a tax professional when ready if you want to reverse a conversion, because the important date may have already passed.

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

No. You can convert part of your 401(k) and leave the rest in the 401(k) or roll it to a traditional IRA. Some people convert in stages over multiple years to spread out the tax bill. Your plan administrator can tell you whether partial conversions are allowed.

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

You can convert company stock to a Roth IRA, but the conversion is taxed based on the stock's value on the day you convert. If the stock is worth $100,000, you owe tax on $100,000. After conversion, the stock grows tax-free in the Roth IRA. Talk to your plan administrator about how to handle company stock conversions, because the process can be different from converting cash.