How to Move Money From Your 401(k) to a Roth IRA

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

A direct transfer from a 401(k) to a Roth IRA is possible, but it works differently than moving money between two traditional accounts. When you move pre-tax 401(k) money into a Roth IRA, the IRS treats it as a conversion. You pay ordinary income tax on the full amount you convert in the year you do it, even though you are not withdrawing the money for personal use. After you pay that tax, the money grows tax-free in the Roth IRA, and you can withdraw earnings without tax once you reach age 59½ and have held the account for at least five years.

The conversion itself is straightforward: your 401(k) plan administrator transfers the funds directly to a Roth IRA you have opened at a bank or brokerage. No tax is withheld during the transfer. You then report the conversion on your tax return and pay the tax bill when you file. The key decision is whether the tax cost makes sense for your situation.

Key Takeaways

• Converting a 401(k) to a Roth IRA requires you to pay income tax on the amount converted in that tax year, but the money then grows tax-free.
• You can only convert money from a 401(k) if your plan allows in-service conversions, or if you have separated from your employer or retired.
• The conversion counts as income for that year, which may push you into a higher tax bracket or affect your Medicare premiums and other tax-based benefits.
• A Roth IRA has no required minimum distributions during your lifetime, unlike a traditional 401(k), which gives you more control over when to withdraw.
• You should compare the tax cost now against the tax savings later, and consider whether you have cash outside the 401(k) to pay the tax bill.

When your 401(k) plan allows conversions

Not all 401(k) plans permit in-service conversions while you are still employed. Some plans allow them only after you turn 59½, others only after you leave the company, and some do not allow them at all. The first step is to contact your plan administrator or check your plan document to see whether conversions are permitted. Your HR department or benefits office can tell you the plan's rules in one phone call.

If you have already left your employer or are retired, you can convert your 401(k) balance to a Roth IRA without asking permission. Once your employment ends, the money is yours to move. If you are still working and your plan does not allow in-service conversions, you will need to wait until you separate from the company or reach the age threshold your plan sets.

How the tax bill works

When you convert $50,000 from a 401(k) to a Roth IRA, the IRS counts that $50,000 as ordinary income on your tax return for that year. If your normal salary is $80,000, your taxable income for the year becomes $130,000. You pay tax on that full amount at your marginal rate — the rate that applies to your highest dollars of income. For many people, this pushes them into a higher tax bracket temporarily.

You do not have to pay the tax from the 401(k) itself. In fact, the plan administrator will not withhold tax during the transfer. You pay the tax bill when you file your return, either from other savings or by making estimated tax payments during the year if the conversion is large. If you do not have cash outside the 401(k) to cover the tax, you would need to withdraw additional money from the 401(k) to pay it — and that withdrawal is taxed separately and may trigger a 10% early withdrawal penalty if you are under 59½.

The conversion also affects other tax calculations. It may increase your adjusted gross income enough to reduce tax deductions you would otherwise claim, trigger the net investment income tax if your income crosses certain thresholds, or increase your Medicare premiums in future years if you are near retirement age.

Roth IRA contribution limits do not apply to conversions

The annual limit on Roth IRA contributions — currently $7,000 per year for people under 50 — does not restrict how much you can convert from a 401(k). You can convert $100,000 or $500,000 in a single year if your plan allows and you are willing to pay the tax. The conversion limit is your 401(k) balance, not the annual contribution cap.

However, there is one income-based rule that used to block high earners from converting: the "backdoor Roth" restriction. If you have a traditional IRA with pre-tax money in it, converting a 401(k) to a Roth IRA can trigger the pro-rata rule, which means a portion of the conversion is taxed as if it came from your traditional IRA. This is a complex calculation, and you should discuss it with a tax professional if you have both a traditional IRA and a 401(k).

The five-year rule for Roth conversions

After you convert money to a Roth IRA, you must wait five years before you can withdraw the converted amount without penalty, even if you are over 59½. This is separate from the five-year rule that applies to Roth contributions. Each conversion has its own five-year clock. If you convert $50,000 in 2024, you cannot touch that $50,000 without penalty until 2029, even though you already paid tax on it.

The earnings on that converted money have their own five-year rule. You can withdraw the converted principal anytime after five years without penalty or tax. But earnings on the conversion cannot be withdrawn tax-free until you reach 59½ and the five-year period has passed. This matters if you convert and then the account grows significantly before you need the money.

Reasons to convert now versus reasons to wait

A conversion makes sense if you expect to be in a higher tax bracket in retirement than you are now. If you are taking a sabbatical, between jobs, or in a year with unusually low income, converting at a low tax rate locks in that rate for money that will grow tax-free for decades. If you are retired and have little other income, a conversion can be cheaper than waiting until required minimum distributions force you to take large taxable withdrawals later.

A conversion does not make sense if you are in your peak earning years and expect lower income in retirement. You would pay tax at a high rate now to avoid tax at a lower rate later — a losing trade. It also does not make sense if you do not have cash outside the 401(k) to pay the tax bill, because withdrawing money from the 401(k) to cover the tax defeats the purpose and may trigger penalties.

Some people convert gradually over several years to spread the tax bill across multiple years and stay in a lower bracket each year. Others convert in a single year if they have a one-time event like a bonus or a year with capital losses that offset the conversion income.

The mechanics of moving the money

To convert, you instruct your 401(k) plan administrator to transfer funds directly to a Roth IRA. You must first open a Roth IRA at a bank, brokerage, or other financial institution if you do not already have one. The administrator will send the money directly to that institution — not to you. This is called a trustee-to-trustee transfer, and it keeps the money in the retirement system without triggering withholding.

You will receive a Form 1099-R from your 401(k) plan showing the conversion amount. You report this on your tax return using Form 8606 if you have any pre-tax IRA money, or simply report it as income if you do not. The Roth IRA custodian will also send you a Form 5498 showing the conversion deposit. Keep all these documents for your records.

The transfer usually takes one to two weeks. During that time, the money is in transit and you cannot access it. Once it lands in the Roth IRA, you can invest it however that account allows — stocks, bonds, mutual funds, or cash, depending on your custodian.

Frequently Asked Questions

Can I convert only part of my 401(k)?

Yes. You can convert any amount up to your full 401(k) balance. Some people convert a portion to manage the tax bill and leave the rest in the 401(k). Your plan administrator can split the transfer however you request.

What happens if I convert and then my income is higher than I expected?

You can undo a conversion by doing a recharacterization, but only if you do it before your tax return is due (including extensions). After the deadline, the conversion is permanent. This is why some people convert early in the year — they have time to see how their income looks and undo it if needed.

Do I have to convert my entire 401(k) when I leave my job?

No. When you separate from your employer, you can leave the money in the 401(k), roll it to a traditional IRA, convert part or all of it to a Roth IRA, or take a distribution. Each option has different tax and withdrawal consequences. You are not required to do anything immediately, though some plans require you to move the money within a certain time frame.

Will converting affect my Social Security benefits?

Conversion income counts toward the income thresholds that determine whether your Social Security benefits are taxed. If you are claiming Social Security and convert a large amount, more of your benefits may become taxable that year. This is worth calculating before you convert if you are in that situation.

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

No. You can only convert money that is actually in the 401(k) account. If you have borrowed from your 401(k), that loan balance cannot be converted. You would need to repay the loan first, then convert the remaining balance if you choose.