Yes, you can convert a 401(k) to a Roth IRA, but you will owe taxes on the amount you move

A Roth conversion lets you take money from a traditional 401(k) and move it into a Roth IRA. The Roth IRA then grows tax-free, and you can withdraw it tax-free in retirement. The catch: you pay income tax on the full amount you convert in the year you do it, calculated at your regular tax rate.

You can convert at any time, whether you are still working or retired. You do not need your employer's permission if you have already left the job. If you still work there, your plan documents determine whether in-service conversions are allowed — ask your plan administrator. There is no income limit on conversions, unlike direct contributions to a Roth IRA, which phase out at higher earnings.

The main reason people convert is to lock in a lower tax year. If you took early retirement, had a year with reduced income, or expect tax rates to rise, converting while you are in a lower bracket saves you money over time.

Key Takeaways

  • You pay ordinary income tax on the full converted amount in the year you convert, so the conversion works best in years when your income is lower than usual.
  • After conversion, the money sits in a Roth IRA and grows tax-free; you can withdraw earnings penalty-free after age 59½ and five years of Roth ownership.
  • If you still work for the company sponsoring the 401(k), check your plan documents or call your HR department to confirm in-service conversions are allowed.
  • You can convert a traditional 401(k), SEP-IRA, or straightforward IRA, but not a 401(k) that holds company stock you want to keep at a lower tax basis.
  • The IRS tracks all your IRAs together for the pro-rata rule, which can create unexpected tax bills if you have other pre-tax IRA balances.

The tax bill you owe when you convert

When you convert, the IRS treats the money as income in that tax year. If you convert $50,000, you add $50,000 to your taxable income for the year. Your tax bill depends on your total income and your tax bracket.

Example: You are 55, retired, and have no other income. You convert $40,000 from your 401(k) to a Roth IRA. For 2024, the standard deduction for a single filer is $14,600. Your taxable income becomes $25,400 ($40,000 minus the standard deduction). If you are in the 22% federal tax bracket, you owe roughly $5,588 in federal tax on the conversion. You pay this tax when you file your return the following April — the money does not come out of the conversion itself.

State income tax applies too in most states. Some states do not tax retirement income, so your state matters. If you live in a state with no income tax, your bill is lower. If you live in a high-tax state, the bill is higher.

How to actually move the money

The mechanics depend on whether you still work for the employer or have already left.

If you have left the job: Contact the 401(k) plan administrator (usually the brokerage or recordkeeper listed on your statements) and ask for a direct rollover to a Roth IRA. Provide the name and account number of the Roth IRA you want to receive the funds. The administrator sends the money directly to the Roth IRA custodian. This avoids the 60-day rule and withholding complications. The whole process takes one to three weeks.

If you still work there: Ask your HR or benefits department whether your plan allows in-service conversions. If it does, you request the conversion through the plan. If it does not, you must wait until you leave the job, retire, or reach age 59½ (depending on the plan). Some plans allow conversions only after you separate from service.

If you take a distribution first: You can ask for a check instead of a direct rollover. The plan will withhold 20% for federal tax. You then have 60 days to deposit the full amount (including the withheld 20%) into a Roth IRA. If you do not deposit the full amount within 60 days, the shortfall counts as a taxable distribution and you may owe a 10% early withdrawal penalty if you are under 59½. This route is riskier and creates more paperwork.

The pro-rata rule and why it matters

If you have any pre-tax IRA balances — a traditional IRA, SEP-IRA, or straightforward IRA — the pro-rata rule applies. The IRS treats all your IRAs as one pool for tax purposes. When you convert, you cannot convert only the after-tax money; you must convert a proportional mix of pre-tax and after-tax funds.

Example: You have a traditional IRA with $90,000 in pre-tax contributions and $10,000 in after-tax contributions (total $100,000). You want to convert $10,000 to a Roth IRA, thinking you will only pay tax on the after-tax portion. Instead, the pro-rata rule says 90% of any conversion is pre-tax ($9,000) and 10% is after-tax ($1,000). You owe tax on the $9,000, not just the $1,000. This rule catches many people off guard.

To avoid this, some people move their pre-tax IRA balances into their current employer's 401(k) plan (if the plan allows it) before converting. This removes the pre-tax IRA from the pro-rata calculation. Then the conversion uses only after-tax money, and you owe less tax. Check with your plan administrator and a tax professional before doing this.

Roth IRA rules after the conversion

Once the money lands in your Roth IRA, it follows standard Roth rules. You can withdraw your contributions (the original amount you put in) at any time, tax-free and penalty-free. Earnings grow tax-free.

To withdraw earnings penalty-free, you must be at least 59½ years old and have owned the Roth IRA for at least five tax years. The five-year clock starts on January 1 of the year you first contributed to any Roth IRA, not the year you converted. If you convert at age 50, you still cannot touch the earnings until age 59½, and the five-year rule still applies.

If you withdraw earnings before age 59½, you owe income tax on them plus a 10% early withdrawal penalty — unless an exception applies (disability, first-time home purchase up to $10,000 lifetime, etc.). The conversion itself does not trigger the early withdrawal penalty; only earnings do.

When a conversion makes sense financially

A conversion is most valuable when you are in a lower tax bracket than you expect to be in retirement. Common scenarios include a year you took early retirement, a year you had a business loss, a year between jobs, or a year before you start taking Social Security (which can push you into a higher bracket).

A conversion also makes sense if you expect tax rates to rise in the future. Since you pay tax now at today's rates, locking in current rates can save money if rates increase later. This is a longer-term bet and depends on your view of future tax policy.

Conversions are less useful if you are already in a high tax bracket or expect to be in a lower bracket soon. Converting when your income is high means paying a large tax bill now without the benefit of a lower rate. If you know you will have lower income next year, waiting might be smarter.

Special situations and limits

There is no annual limit on how much you can convert. You can convert your entire 401(k) in one year or spread it over multiple years. Some people do a series of small conversions over several years to stay in a lower bracket each year.

You cannot undo a conversion after 2017. Before 2018, you could recharacterize a conversion (move the money back) if the market dropped or you changed your mind. That option is gone. Once you convert, the tax bill is locked in.

If you have company stock in your 401(k) with a low cost basis (what you paid for it) and a high current value, consult a tax professional before converting. There may be a more tax-efficient way to handle the stock using the net unrealized appreciation rule.

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 plan or roll it to a traditional IRA. Many people do partial conversions over several years to manage their tax bill. Each conversion is a separate taxable event, so you can spread the tax impact across multiple years.

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

You cannot undo the conversion after the tax year ends. You can withdraw the money from the Roth IRA, but you still owe the tax you paid on the conversion. If you withdraw within five years and you are under 59½, you may also owe a 10% penalty on the earnings portion. Plan conversions carefully.

Can I convert a 401(k) if I am still employed?

Only if your plan allows in-service conversions. Ask your HR or benefits department. Some plans allow them, others do not. If your plan does not allow conversions while you work there, you must wait until you leave the job, retire, or reach age 59½ (rules vary by plan).

Will converting affect my Social Security or Medicare premiums?

Yes, the conversion increases your taxable income for that year, which can push you into a higher Social Security tax bracket or raise your Medicare premiums. If you are close to the income thresholds for these programs, model the conversion's impact before you do it. A tax professional can help you plan around these thresholds.

What if I have both a traditional IRA and a 401(k)?

The pro-rata rule applies to all your IRAs combined, but not to 401(k)s. You can convert your 401(k) without triggering the pro-rata rule. However, if you have a traditional IRA, the rule applies to any IRA conversion. Consider rolling your traditional IRA into your 401(k) first (if the plan allows it) to remove it from the pro-rata calculation.