Yes, you can convert a 401(k) to a Roth IRA, but you'll owe income tax on the amount you move

A Roth conversion means moving money from your 401(k) into a Roth IRA. The IRS allows this, but treats the money you convert as taxable income in the year you do it. You pay tax on the full amount you move — not just the growth, but also the original contributions if they were made with pre-tax dollars. After conversion, that money grows tax-free in the Roth IRA, and you can withdraw it tax-free in retirement.

The decision to convert depends on whether you expect to be in a higher tax bracket now or later, how much cash you have to pay the tax bill, and whether you're still working. If you've already left your job, conversion becomes simpler because you don't have to navigate your former employer's plan rules.

Key Takeaways

  • You can convert a 401(k) to a Roth IRA at any time, but the full amount you convert counts as taxable income that year.
  • You must pay the income tax from your own money — if you use the converted funds to pay the tax, you'll owe tax on that amount too.
  • If you still work for the company that sponsors your 401(k), you may not be able to convert until you leave or reach age 59½, depending on your plan's rules.
  • Converting makes sense if you expect higher tax rates in retirement or want to leave tax-information programs to heirs, but not if you're in a high tax bracket now.
  • You have until the tax filing important date (usually April 15) the following year to undo a conversion if you change your mind.

When you can convert: still employed versus retired

If you still work for the employer that runs your 401(k), your plan document controls whether you can convert. Some plans allow in-service conversions — you can move money to a Roth IRA while still employed. Others don't. You need to check your plan's rules or call your plan administrator to find out. If your plan doesn't allow it, you'll have to wait until you leave the job, retire, or turn 59½.

Once you've left your job, you can convert your old 401(k) to a Roth IRA whenever you want. There's no age limit and no income limit for conversions — the rules that block high earners from contributing directly to a Roth IRA don't explore here. You can convert at 25 or at 75.

If you're still working but have an old 401(k) from a previous employer, you can convert that one when ready. You don't need permission from your current employer.

How the tax bill works

When you convert, the IRS counts the entire amount as ordinary income. 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're in the 24% federal bracket, you'll owe roughly $12,000 in federal tax (plus any state tax, depending on where you live).

You must pay this tax from money outside the 401(k) or Roth IRA. If you use the converted funds themselves to pay the tax bill, you'll owe tax on that amount too, which defeats the purpose. For example, if you convert $50,000 and use $12,000 of it to pay federal tax, you now owe tax on $62,000 of income — a costly mistake.

The tax is due when you file your return for that year. You can't defer it or pay it over time. If you don't have the cash set aside, a conversion can create a large, unexpected bill.

The pro-rata rule: what happens if you have multiple IRAs

If you have both traditional IRAs and Roth IRAs, the IRS treats all of them as one pool for conversion purposes. This is the pro-rata rule, and it can make conversions expensive if you're not careful.

Here's how it works: suppose you have a $100,000 traditional IRA and a $50,000 Roth IRA. You want to convert $30,000 from the traditional IRA to the Roth. The IRS looks at your total IRA balance ($150,000) and calculates what portion is pre-tax money. In this case, $100,000 out of $150,000 is pre-tax, or about 67%. So 67% of your $30,000 conversion — roughly $20,000 — is taxable. The other $10,000 was already after-tax contributions and isn't taxed again.

If you have a large traditional IRA and only a small amount of after-tax contributions, this rule can make conversions very expensive. Some people use a strategy called a backdoor Roth to work around this, but that's a separate process with its own rules.

Undoing a conversion: the recharacterization window

If you convert and then change your mind, you can undo it. This is called a recharacterization. You have until the tax filing important date for that year — usually April 15 of the following year, or October 15 if you file an extension — to move the money back to a traditional IRA.

Recharacterization makes sense if the market drops after you convert and you've already locked in a large tax bill on a smaller amount of money. You can undo the conversion, avoid the tax, and try again in a better year. You can also recharacterize just part of a conversion if you converted multiple times during the year.

Once the important date passes, the conversion is permanent. You can't undo it, and you can't reduce the tax you owe.

Reasons to convert and reasons to wait

A conversion makes sense if you're in a lower tax bracket now than you expect to be in retirement. If you're between jobs, took a sabbatical, or had a low-income year, your tax rate is temporarily low. Converting then lets you pay tax at that low rate and enjoy tax-free growth later.

Conversions also make sense if you want to leave tax-information programs to heirs. Roth IRAs pass to beneficiaries tax-free, while traditional 401(k)s and IRAs are taxable to the person who inherits them. If you have no when ready need for the money and want to build a tax-free legacy, conversion can be worth the upfront tax cost.

You should wait or avoid conversion if you're in a high tax bracket now, expect to be in a lower bracket in retirement, or don't have cash outside the 401(k) to pay the tax. Converting when you're earning peak income means paying peak tax rates. If you'll have less income in retirement, you're better off leaving the money in the traditional account and paying tax at that lower rate later.

The mechanics: how to actually do the conversion

The process depends on whether your 401(k) is with your current employer or a former one. If it's with a former employer, contact the plan administrator or log into the plan's website and request a direct rollover to a Roth IRA. Specify the Roth IRA's financial institution and account number. The plan will send the money directly to that account.

If your plan allows in-service conversions, ask your plan administrator for the conversion form. You'll provide the name and account number of the Roth IRA you want the money to go to. The plan processes it and sends the funds directly.

You can also do an indirect rollover: the plan sends you a check, and you deposit it into a Roth IRA within 60 days. This is riskier because if you miss the important date, the IRS treats it as a distribution, not a conversion, and you'll owe tax plus a 10% penalty if you're under 59½. Most people use the direct method to avoid this risk.

After the conversion, you'll receive a Form 1099-R from the plan showing the amount converted. You report this on your tax return. The financial institution holding your Roth IRA will also send you a Form 5498 showing the contribution. Keep all documents for your records.

Frequently Asked Questions

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

No. You can convert part of your 401(k) and leave the rest in the traditional account. You can also do multiple partial conversions over several years to spread the tax bill across different tax years. This strategy, called a "ladder conversion," can help you stay in a lower tax bracket.

What happens if I convert and then go back to work?

The conversion itself doesn't change. The money is now in a Roth IRA and stays there. However, if you convert while still employed and your plan doesn't allow in-service conversions, you may have violated your plan's rules. Check with your plan administrator before converting if you're still working.

Can I convert a 401(k) loan to a Roth IRA?

No. A loan is not part of your account balance — it's money you've borrowed from yourself. You can only convert the actual balance. If you have an outstanding loan, you'll need to repay it before you leave your job, or it becomes a taxable distribution.

Will a conversion affect my Social Security benefits or Medicare premiums?

Yes, it can. The income from a conversion counts toward your modified adjusted gross income (MAGI), which determines whether your Social Security is taxed and what you pay for Medicare premiums. If you're close to the income thresholds, a large conversion could push you into a higher bracket for both. Run the numbers before converting.

What if I convert and the market drops right after?

You can recharacterize (undo) the conversion by the tax important date and avoid the tax bill. If you wait until after the important date, you're stuck with the tax even though the account is now worth less. This is why some people convert in stages or watch market timing carefully.