Converting Your 401(k) to a Roth IRA: What You Need to Know

Yes, you can convert a 401(k) to a Roth IRA, but the process depends on whether you still work for the employer and how much tax you are willing to pay upfront

A 401(k)-to-Roth conversion moves money from your employer plan into a Roth IRA. The conversion itself is straightforward: you instruct your 401(k) plan administrator to send the funds to a Roth IRA you have opened, and the IRS treats the entire amount as taxable income in that year. You pay ordinary income tax on the full converted amount, but after that, the money grows tax-free and you can withdraw it tax-free in retirement.

The real decision is whether the tax bill makes sense for your situation. A conversion makes sense if you expect to be in a lower tax bracket now than in retirement, or if you want to lock in current tax rates before they rise. It makes less sense if converting would push you into a much higher bracket this year, or if you have a large amount of pre-tax 401(k) money and limited cash to pay the taxes.

Key Takeaways

• You can convert a 401(k) to a Roth IRA while still employed (if your plan allows it) or after you leave the job, but the conversion is taxable in the year you do it.
• You must pay income tax on the full amount converted, using either money from outside the 401(k) or by having the plan withhold taxes from the conversion itself.
• If you have other pre-tax retirement accounts (traditional IRAs, SEP IRAs, or other 401(k)s), the IRS "pro-rata rule" may force you to pay tax on a portion of those accounts too, even if you only convert one account.
• After conversion, the Roth IRA money grows tax-free and you can withdraw it tax-free in retirement, with no required minimum distributions during your lifetime.
• Conversions are permanent — you cannot undo them after the tax year ends, so run the numbers before you commit.

Converting While You Still Work for the Employer

Some 401(k) plans allow an in-service conversion, which means you can convert part or all of your balance to a Roth IRA while you are still employed and contributing to the plan. Not all plans offer this option — you will need to check your plan's summary or call your plan administrator to find out.

If your plan allows it, you can convert as much or as little as you want. Many people convert only a portion to spread the tax bill across multiple years, or convert only the after-tax contributions (money you put in with dollars you already paid tax on). The plan administrator will send the converted amount directly to your Roth IRA, and you will owe tax on the full amount on your tax return for that year.

Converting After You Leave Your Job

Once you separate from your employer, you have more flexibility. You can roll your 401(k) into a Roth IRA at any time, whether you left voluntarily or were laid off. You do not have to wait until you reach a certain age or meet any other condition — the only requirement is that you have left the job.

After you leave, your employer's plan will send you a distribution notice and instructions for rolling the money over. You can ask the plan to send the check directly to your Roth IRA custodian (a direct rollover), which avoids the 20% withholding that applies if the check comes to you. Even with a direct rollover, you still owe income tax on the full amount — the withholding is just a prepayment of that tax.

Understanding the Pro-Rata Rule and Its Tax Trap

The pro-rata rule is the most common reason a conversion costs more tax than people expect. If you have any pre-tax money in any IRA or 401(k) — including a traditional IRA, SEP IRA, SIMPLE IRA, or another 401(k) — the IRS treats all of your pre-tax retirement accounts as one pool when you convert.

Here is how it works: suppose you have a 401(k) with $100,000 and a traditional IRA with $50,000 (both pre-tax). You want to convert the $100,000 401(k) to a Roth. The IRS calculates your pro-rata percentage: $50,000 pre-tax out of $150,000 total means one-third of your retirement money is pre-tax. So one-third of your $100,000 conversion — about $33,333 — is taxable. The other $66,667 is treated as a return of after-tax contributions and is not taxed.

This rule applies even if you convert only one account. The only way around it is to move all your pre-tax IRAs into a 401(k) before you convert, if your new employer's plan accepts rollovers. Some plans do; many do not. Check with your new employer's plan administrator before you convert.

Paying the Tax on Your Conversion

You have two ways to pay the tax owed on a conversion: from outside money or from the conversion itself.

If you pay from outside money — using a bank account, brokerage account, or other non-retirement funds — the full converted amount goes into your Roth IRA. This is the better option if you can afford it, because you maximize the amount growing tax-free. If you convert $100,000 and pay $25,000 in tax from your checking account, your Roth IRA receives the full $100,000.

If you have the plan withhold taxes from the conversion, the plan sends you less money. If you convert $100,000 and the plan withholds $25,000 for taxes, only $75,000 goes into your Roth IRA. You still owe the full $25,000 in tax, but you have only $75,000 in the account to show for it. You will need to pay the remaining tax from outside money when you file your return, or you will face a shortfall.

Timing and Deadlines for Conversions

You can convert a 401(k) to a Roth IRA at any time during the year. The conversion is reported on your tax return for the year in which the money enters the Roth IRA, not the year you initiated the request. If you ask for a conversion in December but the money does not arrive in your Roth account until January, the conversion is taxable in January's tax year.

Once the conversion is complete and you have filed your tax return, you cannot undo it. Before 2018, the IRS allowed people to "recharacterize" a conversion — essentially undo it and move the money back — but that option is no longer available. If you convert and later regret it, you are stuck with the tax bill. This is why running the numbers before you convert is important.

Roth Conversion Ladder and Early Withdrawal Strategy

Some people use conversions as part of a Roth conversion ladder, a strategy for accessing retirement money before age 59½ without the 10% early withdrawal penalty. The idea is to convert a 401(k) to a Roth IRA, wait five years, and then withdraw the converted amount penalty-free. The five-year rule applies to each conversion separately, so you can do multiple conversions in different years and access each one after its own five-year waiting period.

This strategy works only if you have no other Roth IRA money and you do not need the earnings (only the contributions can be withdrawn penalty-free). It is complex and requires careful record-keeping, so talk to a tax professional before you attempt it.

Frequently Asked Questions

Can I convert my 401(k) if I am still working and under age 59½?

Yes. Age does not restrict conversions. You can convert at any age, whether you are still working or retired. You will owe tax on the converted amount, but there is no age requirement or penalty for the conversion itself. If you withdraw the money from the Roth before age 59½, different rules apply, but the conversion alone is allowed.

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

You still owe tax on the full converted amount. Conversions are permanent once the tax year ends. You cannot undo the conversion or reduce the tax bill if your circumstances change. This is why estimating your total income for the year before you convert is important.

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

No. You can convert part of your balance and leave the rest in the 401(k). Some people convert in stages over multiple years to spread the tax bill. Check your plan's rules — not all plans allow partial conversions.

Will a conversion affect my Social Security benefits or Medicare premiums?

A conversion increases your taxable income for that year, which can affect Medicare premiums (based on income from two years prior) and potentially the taxation of Social Security benefits. Run the numbers with a tax professional to see the full impact before you convert.

What if my 401(k) has company stock in it?

Company stock in a 401(k) can be converted like any other holding. However, there is a special rule called net unrealized appreciation that may allow you to avoid tax on the stock's growth if you take it as a distribution instead of converting it. This is a complex situation — talk to a tax professional before you convert a 401(k) that holds company stock.