What happens when you transfer a 401(k) to a Roth IRA

A 401(k) to Roth IRA conversion moves money from your employer retirement plan into a Roth IRA account. The money you move is taxed as income in the year you transfer it — that is the key trade-off. After that, the money grows tax-free and you can withdraw it tax-free in retirement, which is the Roth advantage.

You cannot move the money directly from your 401(k) plan to a Roth IRA. Instead, you first roll it into a traditional IRA, then convert that traditional IRA balance to the Roth. Some employers now offer in-plan Roth conversions, which skip the traditional IRA step, but most do not. The process takes a few weeks to a few months depending on your plan administrator and the IRA provider you choose.

This is different from a regular 401(k) rollover, where you move pre-tax money to a traditional IRA and pay no tax at the time of the move. A Roth conversion triggers a tax bill when ready, so you should only do this if you have money outside the retirement account to pay the taxes owed.

Key Takeaways

  • Money moved from a 401(k) to a Roth IRA is taxed as ordinary income in the year you convert it, so you need to set aside money to pay that tax bill.
  • The standard path is to roll your 401(k) to a traditional IRA first, then convert the traditional IRA to a Roth IRA in a separate step.
  • You must complete the entire conversion within 60 days of receiving the money from your 401(k) plan, or the IRS treats it as a withdrawal and charges penalties.
  • Some employers offer in-plan Roth conversions that let you convert directly without opening a separate traditional IRA.
  • After conversion, you must wait five years before withdrawing the converted money penalty-free, even if you are already past retirement age.

Step 1: Check your 401(k) plan rules

Contact your plan administrator — usually the HR or benefits department at your employer, or a third-party company listed on your 401(k) statements — and ask whether your plan allows rollovers to an IRA. Most plans do, but some restrict rollovers or require you to be separated from the company first. If your plan allows rollovers, ask whether it offers in-plan Roth conversions. If it does, you can skip opening a traditional IRA and convert directly.

Also ask your plan administrator for the rollover paperwork and the name and contact information of the plan custodian — the financial institution that actually holds the money. You will need to coordinate with them to move the funds.

Step 2: Open a traditional IRA (if needed)

If your plan does not offer in-plan Roth conversions, you need to open a traditional IRA at a bank, brokerage, or investment firm before you request the rollover. Common providers include Fidelity, Vanguard, Charles Schwab, and most major banks. The account is free to open and takes 10 to 15 minutes online.

You do not need to fund the account yourself — you are just creating the container where the 401(k) money will land. Once the account is open, you will have an account number and routing information to give to your 401(k) plan administrator.

Step 3: Request a direct rollover from your 401(k)

Tell your plan administrator you want a direct rollover to a traditional IRA. This means the plan sends the money directly to the IRA custodian, not to you. A direct rollover avoids the 60-day rule and withholding taxes that explore to indirect rollovers.

Provide the plan administrator with your new IRA account number, the IRA custodian's name, and the routing information. The plan will prepare a check or electronic transfer in your name, made payable to the IRA custodian. This process usually takes one to two weeks. Do not cash the check or redirect the funds — it must go directly to the IRA.

If you receive the check yourself instead of the custodian, you have 60 days to deposit it into the traditional IRA. If you miss that important date, the IRS treats the money as a withdrawal, and you owe income tax plus a 10% penalty if you are under 59½.

Step 4: Convert the traditional IRA to a Roth IRA

Once the money is in your traditional IRA, contact the IRA custodian and request a Roth conversion. You can convert the entire balance or part of it. The custodian will move the money from the traditional IRA to a Roth IRA — either one you already own or a new one they open for you.

This step is usually when ready or takes one to three business days. The custodian will send you a confirmation and a Form 8606, which you use to report the conversion on your tax return.

Step 5: Report the conversion on your taxes

The amount you converted is taxed as ordinary income in the year you did the conversion. If you converted $50,000, you add $50,000 to your taxable income for that year. Your tax bracket and other income determine how much tax you owe.

File Form 8606 with your tax return to report the conversion. The IRA custodian will also send you a Form 1099-R showing the amount converted. You do not have to pay the tax when you convert — you pay it when you file your return — but it is wise to set aside money to cover the bill so you are not surprised at tax time.

If you converted money that includes both pre-tax and after-tax contributions, the calculation is more complex. The IRS uses a pro-rata rule that taxes a portion of the conversion based on the ratio of pre-tax to after-tax money across all your IRAs. A tax professional can help you navigate this.

The five-year rule for converted money

After you convert money to a Roth IRA, you must wait five years before withdrawing the converted amount without a penalty, even if you are already 59½ or older. This is called the five-year holding period. The five years starts on January 1 of the year you did the conversion.

If you withdraw the converted money before five years pass and you are under 59½, you owe a 10% early withdrawal penalty on top of income tax. If you are 59½ or older, you owe only the 10% penalty — no income tax, because you already paid tax on the conversion.

Earnings that grow inside the Roth after the conversion have their own five-year rule. You can withdraw earnings tax-free only after you turn 59½ and five years have passed since you first opened any Roth IRA, not since the conversion.

Frequently Asked Questions

Can I convert my 401(k) if I am still working at the company?

It depends on your plan. Some plans allow rollovers only after you leave the company or reach age 59½. Others allow in-service rollovers at any time. Ask your plan administrator what your plan permits. If rollovers are blocked, you may be able to wait until you leave the job or reach 59½.

What if I have both pre-tax and after-tax money in my 401(k)?

You can roll over both, but the tax treatment differs. Pre-tax money is taxed when you convert. After-tax money (contributions you made with money you already paid tax on) is not taxed again. The IRS pro-rata rule applies if you have after-tax money, so consult a tax professional to calculate your tax bill correctly.

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

No. You can convert part of your balance and leave the rest in the 401(k) or roll the rest to a traditional IRA. Each conversion is reported separately on your tax return. You can also do multiple conversions in different years to spread out the tax bill.

What happens if I convert and then the market drops?

You still owe tax on the full amount you converted, even if the value drops after the conversion. However, you can undo a conversion with a recharacterization within a certain time window — ask your IRA custodian about the important date, which varies. If you recharacterize, you owe no tax on that conversion.

Can I convert if I have a high income?

Yes. There is no income limit on Roth conversions. The old income limits that blocked high earners from converting were removed in 2010. You can convert any amount, but you will owe tax on the pre-tax portion based on your tax bracket.