Moving Money From a 401(k) to a Roth IRA: What Happens and How It Works

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

You can transfer funds from a 401(k) to a Roth IRA through a process called a Roth conversion. The money moves directly from your 401(k) plan to a Roth IRA you open or already own. However, unlike moving money between traditional retirement accounts, a Roth conversion triggers a tax bill in the year you convert. The IRS treats the amount you move as taxable income, and you pay tax at your ordinary income tax rate on the full converted amount.

The conversion itself is straightforward: you contact your 401(k) plan administrator, request a distribution, and direct it to a Roth IRA at a bank, brokerage, or credit union. Some plans allow you to convert directly without the money passing through your hands; others send you a check, which you then deposit into the Roth IRA within 60 days. Either way, the tax obligation is the same.

Whether a conversion makes sense depends on your current tax bracket, how much you convert, and whether you have other retirement savings. Converting a large amount in a single year can push you into a higher tax bracket and increase your tax bill significantly. Some people convert small amounts over several years to spread the tax impact.

Key Takeaways

• A Roth conversion moves 401(k) money to a Roth IRA but creates a tax bill equal to your ordinary income tax rate on the converted amount in that year.
• You can convert directly from your 401(k) plan to a Roth IRA without the money passing through your hands, which avoids the 60-day deposit important date.
• If you have other traditional IRAs or SEP IRAs, converting a 401(k) to a Roth may trigger the pro-rata rule, which taxes a portion of all your traditional IRA balances.
• You must have earned income in the year you convert, and you cannot convert money that is still subject to your employer's plan restrictions.
• Once money is in a Roth IRA, future growth and withdrawals after age 59½ are tax-free, which is the main reason people convert despite the upfront tax cost.

When you can and cannot convert a 401(k)

You can convert a 401(k) to a Roth IRA in most situations, but timing and your employment status matter. If you are still working for the employer that sponsors your 401(k), you may not be able to convert until you leave the job, retire, or reach age 59½. Some plans allow in-service conversions before you leave, but this is not standard. Check with your plan administrator about your specific plan's rules.

Once you leave your job, you can convert the 401(k) balance at any time. You do not have to wait until retirement or reach a certain age. If you are self-employed or have a Solo 401(k), you can convert whenever you choose. The only requirement is that you have earned income in the year you convert — the IRS does not allow conversions if you have no income that year.

You cannot convert money that is still restricted by your plan. For example, if your 401(k) has employer matching contributions that are subject to a vesting schedule, you can only convert the portion that has vested. Unvested money stays in the plan until you meet the vesting requirements or leave the job.

The tax bill you owe when you convert

The amount you convert is added to your taxable income for that year. If you convert $50,000, you report $50,000 as additional income on your tax return. You then pay income tax on that amount at your marginal tax rate — the rate that applies to your highest income bracket that year.

If you are in the 22% federal tax bracket and convert $50,000, you owe approximately $11,000 in federal income tax on the conversion (plus any applicable state income tax). This is due when you file your tax return the following year. You do not pay it upfront, but you should plan for it so you are not caught off guard.

Converting a large amount in a single year can push you into a higher tax bracket. For example, if you are close to the top of the 22% bracket and convert $100,000, part of that conversion may be taxed at 24%. This is why some people spread conversions over multiple years — converting $20,000 or $30,000 per year instead of the full amount at once.

The pro-rata rule and other traditional IRAs

If you have a traditional IRA, SEP IRA, or straightforward IRA in addition to your 401(k), the pro-rata rule applies to your conversion. This rule says you cannot convert only the pre-tax portion of your traditional IRAs while leaving the after-tax portion behind. Instead, the IRS treats all your traditional IRAs as one pool and taxes a proportional share of the conversion.

Here is how it works: suppose you have $100,000 in a traditional IRA (all pre-tax contributions) and $10,000 in after-tax contributions in a SEP IRA. Your total is $110,000. If you convert $50,000 from your 401(k) to a Roth, the pro-rata rule says that 90.9% of the conversion ($45,450) is taxable, and 9.1% ($4,550) is not, because 9.1% of your total IRA balance is after-tax money. You pay tax on $45,450, not just the $50,000 from the 401(k).

The pro-rata rule does not explore to money still in your 401(k), only to IRAs you own separately. If you want to avoid the pro-rata rule, you can roll your traditional IRA into your 401(k) plan before converting, but only if your plan allows incoming rollovers. This consolidates your accounts and may let you convert the 401(k) without triggering the pro-rata calculation.

How to request a conversion from your 401(k) plan

Contact your 401(k) plan administrator — usually the benefits department at your employer or a third-party administrator if your company uses one. Ask for a direct rollover to a Roth IRA. Provide the name and account number of the Roth IRA where you want the money sent.

A direct rollover means the plan sends the money straight to your Roth IRA custodian without giving you a check. This is the cleanest method because the money never passes through your hands, and there is no 60-day important date to worry about. The plan will send a form to your Roth IRA custodian confirming the transfer.

If your plan does not offer direct rollovers or you request an indirect rollover instead, the plan will send you a check. You then have 60 days to deposit it into your Roth IRA. If you miss the 60-day window, the IRS treats the money as a distribution, not a conversion, and you lose the opportunity to move it to the Roth. You will owe tax on the full amount and may face a 10% early withdrawal penalty if you are under 59½.

What happens to employer match and vesting

If your 401(k) includes employer matching contributions, only the vested portion can be converted. Unvested matching money stays in the plan and is forfeited if you leave the job before the vesting schedule is complete. Check your plan documents or ask your benefits department how much of your balance is vested.

Your own contributions and any earnings on them are always 100% vested and can be converted when ready. Employer match and profit-sharing contributions follow the plan's vesting schedule, which is typically three to six years. Some plans use cliff vesting (you get nothing until a certain date, then you get everything), while others use gradual vesting (you get a percentage each year).

If you are partially vested, you can convert only the vested portion. The unvested portion remains in the plan. If you leave the job, the unvested balance is forfeited and returned to the employer.

Roth conversion versus other 401(k) options

A Roth conversion is one way to move 401(k) money, but it is not the only option. You can also roll a 401(k) into a traditional IRA, which avoids the when ready tax bill but keeps the money in a pre-tax account. Withdrawals from a traditional IRA are taxed as ordinary income in retirement.

If you are still working and your new employer offers a 401(k), you may be able to roll your old 401(k) into the new plan. This keeps the money in a 401(k) structure and may offer lower fees or better investment options than your old plan.

You can also leave the 401(k) where it is if your balance is above your plan's minimum (usually $5,000). This is called a "leave it there" option and is useful if you like the plan's investments or want to delay decisions. However, you cannot make new contributions to a 401(k) after you leave the job, so the account will not grow as much as an active plan.

Frequently Asked Questions

Do I have to convert my entire 401(k) balance 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. This lets you spread the tax impact over time by converting smaller amounts in different years. However, if you request a partial conversion, the plan may require you to take a full distribution and then decide how much to convert versus how much to roll to a traditional IRA.

What if I convert and then the market drops — can I undo it?

Yes, through a process called a recharacterization. You can move the converted money back to a traditional IRA (or back to your 401(k) if it allows incoming rollovers) before your tax return is filed. This undoes the conversion for tax purposes. However, you must do this by the tax filing important date (usually April 15 of the following year, plus extensions). If the market recovers, you cannot recharacterize to undo a good decision.

Can I convert if I am still working and under 59½?

Yes, you can convert at any age if you are no longer employed by the company sponsoring the 401(k). If you are still working for that employer, you may not be able to convert until you leave, reach 59½, or your plan allows in-service conversions. Once converted, the money in the Roth IRA is subject to the five-year rule: you cannot withdraw earnings tax-free until five years have passed and you are 59½ or meet another exception.

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

Yes, a conversion increases your taxable income for that year, which can affect your Social Security tax and Medicare premiums. If you are close to the income thresholds for these programs, a large conversion may push you into a higher bracket and increase what you pay. This is another reason to consider spreading conversions over multiple years.

What if my 401(k) plan does not allow conversions?

If your plan does not allow direct conversions, you can roll the money to a traditional IRA first, then convert the IRA to a Roth. This takes two steps but achieves the same result. Ask your plan administrator whether they allow direct conversions or if you need to use the two-step method.