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

A rollover from a 401(k) to a Roth IRA is allowed under federal tax law, but it is not the same as rolling to a traditional IRA. When you move pre-tax money from a 401(k) into a Roth, the IRS treats the conversion as taxable income in the year you do it. You pay ordinary income tax on the full amount converted, then the money grows tax-free inside the Roth going forward.

The process itself is straightforward: your 401(k) plan administrator transfers the money directly to a Roth IRA you open, or you receive a check and deposit it yourself within 60 days. The tax bill comes later, when you file your return for that tax year. Whether a conversion makes sense depends on your current tax bracket, how long you plan to keep the money invested, and whether you have other retirement savings.

Key Takeaways

  • You can roll a 401(k) to a Roth IRA at any time, but you must pay income tax on the full amount converted in that tax year.
  • A direct rollover from your 401(k) plan to a Roth IRA avoids the 60-day important date and withholding complications that come with taking a check yourself.
  • You can convert a 401(k) to a Roth IRA regardless of your income level, unlike Roth IRA contributions, which have income limits.
  • After conversion, the money in the Roth grows tax-free, and you can withdraw earnings penalty-free after age 59½ and five years of Roth ownership.
  • If your 401(k) has both pre-tax and after-tax money, the conversion is more complex because the IRS requires you to account for all your IRAs when calculating the tax owed.

How a direct rollover works and why it matters

A direct rollover means your 401(k) plan sends the money straight to your Roth IRA custodian without the money passing through your hands. You contact your 401(k) plan administrator, request a direct rollover to a Roth IRA, and provide the name and account number of the Roth IRA you want to receive the funds. The administrator handles the transfer, which usually takes one to two weeks.

This method avoids two problems that come with taking a check yourself. First, if you receive the check and miss the 60-day important date to deposit it into the Roth, the IRS treats it as a distribution you kept, and you owe tax on it plus a 10% early withdrawal penalty if you are under 59½. Second, some 401(k) plans withhold 20% of the amount for federal income tax when they issue a check to you, even though you intend to roll it over. With a direct rollover, no withholding happens, and you avoid that complication.

The tax bill: when you owe and how much

When you convert a 401(k) to a Roth IRA, the entire amount you convert counts as ordinary income on your federal tax return for that year. If you convert $50,000, you add $50,000 to your taxable income. The tax you owe depends on your tax bracket that year — if you are in the 24% bracket, you would owe roughly $12,000 in federal tax (plus any state income tax, depending on where you live).

You do not have to pay the tax from the converted funds. You can pay it from other money — a bank account, your paycheck, or another source. If you pay the tax from the converted funds themselves, you are converting less money to the Roth, and you still owe tax on the full original amount. For example, if you convert $50,000 but use $12,000 of it to pay the tax bill, you still owe tax on the full $50,000, not $38,000.

The timing of when you owe the tax matters. You do not pay it when you do the rollover. Instead, you report the conversion on your tax return for that year and pay the tax when you file or when you make estimated tax payments. If the conversion pushes you into a higher tax bracket, you will owe more tax than you would have otherwise.

Pre-tax and after-tax money in your 401(k): the pro-rata rule

If your 401(k) contains both pre-tax contributions (the money that was deducted from your paycheck before taxes) and after-tax contributions (money you put in after paying tax on it), a conversion is more complicated. The IRS pro-rata rule requires you to treat all your IRAs and 401(k)s as one pool when you convert. You cannot pick and choose to convert only the after-tax money and leave the pre-tax money behind.

Here is how it works: suppose your 401(k) has $60,000 in pre-tax money and $40,000 in after-tax money, for a total of $100,000. You want to convert $40,000 (the after-tax portion) to a Roth. The IRS calculates the ratio of pre-tax to after-tax across all your retirement accounts. In this case, 60% is pre-tax and 40% is after-tax. Of the $40,000 you convert, $24,000 (60%) is treated as pre-tax and taxable, and $16,000 (40%) is treated as after-tax and not taxable. You owe tax only on the $24,000.

If you also have a traditional IRA with $50,000 in it, the pro-rata calculation includes that too. The pool becomes $210,000 total ($60,000 pre-tax in 401(k) + $40,000 after-tax in 401(k) + $50,000 in traditional IRA), and the pre-tax percentage is now about 52%. This rule applies even if you do not intend to convert the traditional IRA — it still counts in the calculation. Many people find this rule a reason to roll a traditional IRA into a 401(k) before doing a Roth conversion, to remove it from the pro-rata calculation.

Income limits: Roth conversions have none, but Roth contributions do

Unlike Roth IRA contributions, which have income limits that prevent high earners from putting money in directly, Roth conversions have no income limit. You can convert a 401(k) to a Roth IRA no matter how much you earn. This is why conversions are sometimes called the "backdoor Roth" strategy — people with income above the Roth contribution limit use conversions to get money into a Roth anyway.

For 2024, the Roth IRA contribution limit phases out for single filers with modified adjusted gross income (MAGI) between $146,000 and $161,000, and for married filing jointly between $230,000 and $240,000. If your income is above those ranges, you cannot contribute directly to a Roth. But you can convert a 401(k) or traditional IRA to a Roth in any amount, regardless of income. The conversion itself does not trigger any income-based restrictions.

Withdrawal rules after you convert

Once money is in a Roth IRA, the withdrawal rules change. You can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free. But earnings (the growth on that money) are subject to restrictions. You can withdraw earnings penalty-free only if you are at least 59½ years old and have owned the Roth for at least five tax years. If you withdraw earnings before meeting both conditions, you owe a 10% early withdrawal penalty plus income tax on the earnings.

The five-year rule applies to each Roth IRA separately, but there is an exception for conversions. When you convert a 401(k) to a Roth, the money you converted counts as a contribution for withdrawal purposes, not as earnings. You can withdraw the converted amount at any time without penalty. Only the earnings on that converted money are subject to the five-year and age 59½ rules. This distinction matters if you need access to the money before retirement.

When a conversion might make sense

A Roth conversion can be useful if you expect to be in a higher tax bracket later, or if you want to reduce the size of your pre-tax retirement accounts. Converting now at a lower tax rate means you pay less tax upfront, and the money grows tax-free in the Roth. This is especially relevant if you are between jobs, taking a sabbatical, or in a year when your income is unusually low.

Conversions can also help with required minimum distributions (RMDs). Traditional 401(k)s and IRAs require you to withdraw a minimum amount each year starting at age 73 (as of 2023). Roth IRAs have no RMD requirement during your lifetime. By converting some of your pre-tax money to a Roth, you reduce the size of your traditional accounts and lower your future RMD obligations, which can help manage your taxable income in retirement.

A conversion is usually not worth doing if you are in a high tax bracket now and expect to be in a lower one later, or if you do not have money outside the 401(k) to pay the tax bill. Paying the tax from the converted funds themselves reduces the amount that actually ends up in the Roth, which defeats much of the purpose.

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

First, open a Roth IRA if you do not already have one. You can open one at a brokerage, bank, or investment company — the same places that offer traditional IRAs. You will need to provide your name, Social Security number, and address.

Second, contact your 401(k) plan administrator (usually through your plan's website or the HR department at your employer) and request a direct rollover to your Roth IRA. Provide the name of the financial institution holding your Roth, the account number, and the amount you want to convert. Ask whether the plan has any restrictions on rollovers or whether you need to be separated from service (no longer employed there) to do a conversion. Some plans do not allow in-service conversions while you are still employed.

Third, the plan administrator will process the transfer, which typically takes one to two weeks. You will receive confirmation once the money arrives in your Roth IRA.

Fourth, when you file your tax return for that year, report the conversion on Form 8606 (Nondeductible IRAs). This form tells the IRS how much you converted and calculates how much of it is taxable. Your tax software or tax preparer can help you complete this form.

Frequently Asked Questions

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

It depends on your plan. Some 401(k) plans allow in-service conversions, and some do not. You need to check your plan documents or ask your HR department or plan administrator. Even if your plan does not allow conversions while you are employed, you can convert after you leave the job.

What happens if I convert and then the market drops?

You still owe tax on the amount you converted, based on the value on the day of the conversion. If the value drops afterward, you cannot undo the conversion to avoid the tax. However, you can do a "recharacterization" in limited situations — if you converted in the same tax year and the IRS allows it, you can move the money back to a traditional IRA and redo the conversion later. Rules on recharacterization are strict, so consult a tax professional.

Do I have to convert my entire 401(k), or can I convert just part of it?

You can convert any amount you choose, from a small portion to the entire balance. However, if your 401(k) has both pre-tax and after-tax money, the pro-rata rule applies to whatever amount you convert, not just the after-tax portion.

Will a Roth 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 income bracket for Social Security taxation and Medicare premium calculations. If you are close to the income thresholds for these programs, a large conversion might increase your costs. A tax professional can help you model the impact before you convert.

Can I convert my 401(k) to a Roth if I am retired?

Yes. There is no age limit on conversions. You can convert at any age, whether you are still working, retired, or somewhere in between. The only requirement is that you have a 401(k) with money in it and you open a Roth IRA to receive the funds.