You can transfer money from a 401(k) to a Roth IRA, but you will owe income tax on the amount you move

A Roth conversion — moving pre-tax 401(k) money into a Roth IRA — is allowed under federal tax law. The IRS does not block the move itself. What changes is the tax bill: money that was never taxed in your 401(k) becomes taxable income in the year you convert it. If you convert $50,000, you report $50,000 as income on that year's tax return, and you owe tax on it at your ordinary income rate.

The reason people do this anyway is that Roth IRAs have advantages a 401(k) does not. Once money is in a Roth, it grows tax-free forever, and you never have to take withdrawals at any age. A 401(k) requires you to start taking distributions at age 73 (as of 2023), whether you need the money or not. For some people, paying tax now to avoid forced withdrawals and tax-free growth later makes financial sense. For others, it does not.

You do not have to convert your entire 401(k) at once. You can convert part of it one year and part another year, which lets you spread the tax bill across multiple years and potentially stay in a lower tax bracket.

Key Takeaways

  • Converting a 401(k) to a Roth IRA triggers income tax on the full amount converted in that tax year, at your ordinary income tax rate.
  • You can do a partial conversion, moving only some of your 401(k) balance to a Roth IRA and leaving the rest in the 401(k).
  • The conversion must go directly from your 401(k) plan to the Roth IRA (a direct rollover) or you have 60 days to deposit it yourself, or the IRS treats it as an early withdrawal with penalties.
  • If you have other pre-tax IRA accounts, the IRS applies a pro-rata rule that may increase your tax bill even if you only convert part of your 401(k).
  • You cannot undo a Roth conversion after the tax year ends, so understand the tax cost before you move the money.

The tax cost of converting depends on your income that year

When you convert 401(k) money to a Roth IRA, the IRS adds the converted amount to your taxable income for that year. If you earn $80,000 and convert $30,000, your taxable income becomes $110,000. You then owe tax on that $110,000 at whatever your tax bracket is.

This matters because tax brackets are progressive — the more income you have, the higher your rate. Converting a large amount in a single year might push you into a higher bracket and cost you more in tax than converting the same amount over two or three years. Some people time conversions for years when their income is lower (a year they took unpaid leave, retired early, or had business losses) to keep their tax rate down.

You should calculate your estimated tax bill before you convert. Your tax software or a tax preparer can show you what your bill would be if you convert $20,000 versus $50,000. That number is the real cost of the conversion, and it should factor into whether the move makes sense for you.

Direct rollovers and the 60-day rule

The safest way to convert is a direct rollover: you contact your 401(k) plan administrator and ask them to send the money directly to your Roth IRA custodian (the bank or brokerage holding your Roth). The money never touches your hands. This avoids the 60-day rule entirely.

If you take the money yourself instead, the IRS gives you 60 days to deposit it into a Roth IRA. If you miss that important date, the IRS treats the withdrawal as a taxable distribution, and if you are under 59½, you also owe a 10 percent early withdrawal penalty on top of the income tax. The 60-day clock starts the day you receive the check, not the day you request it.

Even if you make the 60-day important date, taking the money yourself creates a second problem: your 401(k) plan may withhold federal income tax automatically (usually 20 percent). If you convert $50,000 and the plan withholds $10,000, only $40,000 goes into the Roth IRA. You still owe tax on the full $50,000, so you have to cover the $10,000 shortfall from your own money or face penalties. A direct rollover avoids this withholding entirely.

The pro-rata rule can increase your tax bill

If you have any pre-tax IRA accounts — traditional IRAs, SEP IRAs, or straightforward IRAs — the IRS applies the pro-rata rule to your conversion. This rule treats all your pre-tax IRAs as one pool for tax purposes, even if they are at different banks.

Here is how it works: suppose you have a traditional IRA with $100,000 in pre-tax money and a 401(k) with $50,000. You want to convert just the 401(k) to a Roth. The IRS looks at your total pre-tax retirement savings: $150,000. It calculates what percentage is pre-tax: 100 percent. Then it applies that percentage to the conversion. You owe tax on the full $50,000 you convert.

Now suppose that same traditional IRA has $100,000 in pre-tax money and $100,000 in after-tax money (money you contributed without a deduction). Your total is $200,000, but only $100,000 is pre-tax. The pro-rata rule says 50 percent of your conversion is taxable. If you convert $50,000 from your 401(k), you owe tax on $25,000 of it, not the full $50,000.

This rule applies even if you do not touch your traditional IRA. Many people are surprised to learn they have a hidden after-tax IRA balance from old contributions or rollovers. Before you convert, ask your IRA custodian for a statement showing how much of your balance is pre-tax and how much is after-tax.

When a conversion makes sense

A Roth conversion is most useful if you expect your tax bracket to be higher in retirement than it is now. If you are in a low-income year (you took time off work, sold a business at a loss, or retired early), converting then locks in a lower tax rate on that money forever. Once it is in the Roth, it grows tax-free and you never pay tax on the growth or the withdrawals.

Conversions also help if you want to leave money to heirs. Roth IRAs have no required minimum distributions during your lifetime, so you can let the balance grow as long as you live. Your heirs inherit a Roth IRA that continues to grow tax-free (though they do have to take distributions over 10 years under current law). A traditional 401(k) or IRA forces you to take withdrawals starting at 73, which can push you into a higher tax bracket and reduce what you can leave behind.

A conversion does not make sense if you are in a high tax bracket now and expect to be in a lower one in retirement. If you are still working and earning $200,000 a year, converting $100,000 of your 401(k) might push you into the top tax bracket. If you plan to retire next year and live on $60,000 a year, you would pay more tax converting now than you would pay on the withdrawals later.

You cannot reverse a conversion after the year ends

Before 2018, you could undo a Roth conversion if you changed your mind — the IRS called this a "recharacterization." That option no longer exists. Once you convert money to a Roth IRA, it stays converted. You owe the tax on it, even if the account loses value after you convert.

This is why calculating the tax cost beforehand matters. If you convert $50,000 and the market drops 20 percent before the end of the year, you still owe tax on the full $50,000, even though the account is now worth $40,000. You cannot undo the conversion to avoid that tax bill.

Some people do a "test" conversion of a small amount first — say, $5,000 — to see how the process works and what the tax bill looks like. Then they decide whether to convert more. This is a reasonable approach if you are new to conversions and want to understand the mechanics before moving a large sum.

Steps to convert your 401(k) to a Roth IRA

First, open a Roth IRA if you do not already have one. You can open one at any bank, brokerage, or investment firm — Fidelity, Vanguard, Charles Schwab, and others all offer them. You will need your Social Security number and basic personal information.

Second, contact your 401(k) plan administrator (usually your employer's benefits department or the plan custodian) and ask for a direct rollover form. Tell them you want to roll over a specific amount to a Roth IRA, and provide the name and account number of the Roth IRA you just opened. Request a direct rollover so the money goes straight from your 401(k) to your Roth without passing through your hands.

Third, the plan will send the money to your Roth IRA custodian. This usually takes one to two weeks. Once it arrives, the conversion is complete. You do not need to do anything else.

Fourth, when you file your tax return for that year, report the conversion on Form 8606 (Nondeductible IRAs). Your tax software will guide you through this, or your tax preparer will handle it. This form tells the IRS how much you converted and ensures you pay tax on it.

Frequently Asked Questions

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

Yes, you can convert while still employed, as long as your employer's 401(k) plan allows it. Some plans do not permit conversions while you are still working. Check with your benefits department first. Once you leave the job, you can always convert the balance after you roll it over to an IRA.

What if I convert and then lose my job?

Losing your job does not undo the conversion or change your tax bill. You still owe tax on the converted amount in the year you converted it. However, if your income drops significantly after the conversion, you may be in a lower tax bracket that year, which could reduce your overall tax bill. Your tax preparer can help you understand the impact.

Can I convert only the after-tax contributions in my 401(k)?

Not directly. When you convert a 401(k), the IRS treats it as a proportional withdrawal of pre-tax and after-tax money. If your 401(k) is 80 percent pre-tax and 20 percent after-tax, a $50,000 conversion includes $40,000 pre-tax (taxable) and $10,000 after-tax (not taxable). You cannot cherry-pick only the after-tax portion.

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

No. You can convert part of your balance one year and the rest later, or spread it across multiple years. This lets you manage your tax bill by staying in a lower bracket. Each conversion is reported separately on your tax return.

What happens if I convert and then need the money back?

Once money is in a Roth IRA, you can withdraw your contributions (the money you converted) at any time without penalty. You cannot withdraw the earnings (growth) before age 59½ without owing a 10 percent penalty, unless an exception applies. The conversion itself cannot be undone, so plan accordingly.