Moving Money From a 401(k) to a Roth IRA: What You Need to Know

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

A Roth conversion lets you take money from your 401(k) and deposit it into a Roth IRA. The money grows tax-free in the Roth account, and you can withdraw earnings tax-free after age 59½ if the account has been open at least five years. The catch: you pay ordinary income tax on the full amount you convert in the year you move it, even though you do not receive the money as a paycheck.

You can do this conversion at any age and at any time, whether you are still working or retired. You do not need your employer's permission. The conversion happens between financial institutions—your 401(k) custodian and your Roth IRA custodian—so you never touch the cash yourself.

Whether a conversion makes sense depends on your current tax bracket, how much you expect to earn in retirement, and whether you have the cash on hand to pay the tax bill without withdrawing from the conversion itself.

Key Takeaways

• You can convert 401(k) money to a Roth IRA at any age, but you must pay income tax on the full converted amount in that tax year.
• A direct trustee-to-trustee transfer keeps the money moving between institutions without triggering withholding or early withdrawal penalties.
• If you have a traditional IRA, SEP IRA, or SIMPLE IRA, the "pro-rata rule" may increase your tax bill on a Roth conversion, so consult a tax professional first.
• Roth conversions are permanent—you cannot undo them after the tax deadline, so plan the timing and amount carefully.
• You can convert as much or as little as you want each year, but larger conversions push you into higher tax brackets and may trigger Medicare premium increases.

How a Roth conversion works step-by-step

Start by opening a Roth IRA if you do not already have one. You can open one at any brokerage, bank, or robo-advisor that offers IRAs—Vanguard, Fidelity, Charles Schwab, and others all offer them. There is no income limit to open a Roth IRA itself; the income limits apply only to direct contributions, not conversions.

Next, contact your 401(k) plan custodian (the company that holds your 401(k) account) and ask for a direct trustee-to-trustee transfer to your Roth IRA. You will need to provide your Roth IRA custodian's name, your account number at that custodian, and the amount you want to convert. The 401(k) custodian sends the money directly to the Roth custodian—you do not receive a check. This method avoids the 60-day rollover rule and withholding requirements.

The money typically arrives in your Roth IRA within 5 to 10 business days. Your 401(k) custodian will send you a Form 1099-R showing the conversion amount. When you file your tax return, you report this conversion on Form 8606, and you pay income tax on the full amount at your ordinary tax rate.

The tax bill: what you owe and when

If you convert $50,000 from your 401(k) to a Roth IRA, you owe income tax on that $50,000 in the year of the conversion. If you are in the 24% federal tax bracket, that is $12,000 in federal tax alone. Some states also tax Roth conversions, depending on where you live.

The tax is due when you file your return the following April. You can pay it from your regular income, from savings, or from a separate account—but if you withdraw money from the 401(k) or Roth IRA itself to pay the tax, you may trigger additional penalties. The smartest approach is to pay the tax from money outside the retirement accounts.

If you do not have cash on hand to cover the tax, a smaller conversion might make more sense. You could convert $20,000 one year and $20,000 the next, spreading the tax bill across two years and potentially staying in a lower bracket each year.

When a conversion makes financial 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 between jobs, taking a sabbatical, or have unusually low income in a particular year, that year might be a good time to convert—you will pay tax at a lower rate than you would in a higher-earning year.

Conversions also help if you want to reduce your required minimum distributions (RMDs) later. Traditional 401(k)s and traditional IRAs force you to withdraw money starting at age 73, and those withdrawals are taxed as income. A Roth IRA has no RMD requirement, so converting now lets you control when and how much you withdraw in retirement.

Conversions can also benefit your heirs. Roth IRAs pass to beneficiaries tax-free (though beneficiaries must withdraw the money within 10 years under current rules). A traditional 401(k) passes with a tax bill attached to whoever inherits it.

The pro-rata rule: a hidden tax trap

If you have a traditional IRA, SEP IRA, or SIMPLE IRA in addition to your 401(k), the IRS applies the pro-rata rule to your conversion. This rule treats all your IRAs as one pool for tax purposes, even if they are at different institutions.

Here is how it works: suppose you have a traditional IRA with $100,000 (pre-tax money) and a Roth IRA with $10,000 (after-tax money). You want to convert $50,000 from your 401(k) to the Roth. The IRS looks at your total IRA balance ($110,000) and calculates what percentage is pre-tax ($100,000 ÷ $110,000 = 91%). You owe tax on 91% of the $50,000 conversion, or $45,500, even though you only converted from the 401(k).

The 401(k) itself is not subject to the pro-rata rule—only IRAs are. If you have traditional IRA balances, you may want to roll them into your 401(k) before converting, to avoid this penalty. Not all 401(k) plans accept rollovers, so check with your plan administrator first.

Roth conversions after leaving your job

You can convert a 401(k) to a Roth IRA whether you are still employed or retired. If you have left your job, you have three main options for the 401(k): leave it with your former employer, roll it to an IRA, or convert it to a Roth.

If you roll the 401(k) to a traditional IRA first, then convert to a Roth, the pro-rata rule applies. If you convert directly from the 401(k) to the Roth without touching an IRA, the pro-rata rule does not apply—only the 401(k) money is taxed. This is one reason to convert directly from the 401(k) if you can, rather than rolling to an IRA first.

If you are still working and your new employer's 401(k) plan accepts rollovers, you can roll your old 401(k) into the new plan, then convert from there. This also sidesteps the pro-rata rule.

Conversions and Medicare premiums

A large Roth conversion can increase your Modified Adjusted Gross Income (MAGI) for the year, which affects your Medicare premiums if you are on Medicare or about to enroll. Higher MAGI can trigger higher premiums for Part B (medical insurance) and Part D (prescription drug coverage).

Medicare uses your tax return from two years prior to set your premiums. If you convert $100,000 in 2024, your 2026 Medicare premiums may increase based on that 2024 income. If you are approaching Medicare age, consider the timing and size of your conversion carefully, or spread it across multiple years to keep any single year's income lower.

You cannot undo a conversion

Before 2018, you could undo a Roth conversion by filing an amended return—a process called a "recharacterization." That option no longer exists. Once you convert, the conversion is permanent. If the market drops and your converted assets lose value, you cannot reverse the conversion to avoid the tax.

This is why timing and amount matter. If you are unsure whether a conversion is right for you, start small—convert a modest amount one year and see how it affects your taxes and overall financial picture. You can always convert more in future years.

Frequently Asked Questions

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

No. You can convert as much or as little as you want, and you can do multiple conversions in the same year or spread them across different years. Many people convert in smaller amounts to stay in a lower tax bracket and avoid a large single-year tax bill.

What if my 401(k) has employer matching money in it?

You can convert employer matching money just like your own contributions. The entire converted amount is taxed as ordinary income. The source of the money (your contribution or the employer's match) does not change the tax treatment.

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

Yes, as long as your 401(k) plan allows "in-service conversions." Not all plans permit this, so check your plan documents or ask your HR or benefits department. If your plan does not allow it, you can convert after you leave the job.

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

Once money is in a Roth IRA, you can withdraw your contributions (the amount you converted) at any time without penalty or tax. You cannot withdraw earnings before age 59½ without a 10% penalty, unless you meet a specific exception like disability or a first-time home purchase (up to $10,000 lifetime). Plan conversions assuming the money will stay invested.

Does a Roth conversion affect my Social Security benefits?

Roth conversions do increase your Modified Adjusted Gross Income (MAGI) for that year, which can affect how much of your Social Security is taxed if you are receiving benefits. The conversion itself does not reduce your benefits, but the higher income may trigger taxation of benefits you would otherwise receive tax-free.