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Converting a 401(k) to a Roth IRA can potentially provide valuable long-term benefits, but you’ll also need to plan for a bigger tax bill. While the taxes on a Roth conversion can’t be avoided, you can reduce the burden through several strategies like gradual conversions and timing adjustments. Those nearing retirement can weigh whether they have enough time left to offset conversion taxes through decades of future tax-free growth.
A financial advisor can help you with Roth conversions or other retirement planning questions.
Roth Conversion Mechanics
When moving savings from a traditional IRA or 401(k) to a Roth IRA, savers must pay income tax on the converted amount since this money was originally contributed pre-tax. These conversion taxes are unavoidable, so there’s no way to completely get around paying income taxes on a Roth conversion. Taxes are levied on Roth conversions as if the money were ordinary income, meaning that a large Roth conversion can trigger a large tax payment in the year of the conversion.
Despite the potential for a significant tax bill, the benefit of tax-free growth going forward may make it worthwhile. Depending on an investor’s time horizon, income sources and other factors, the upfront tax hit may pay off over the long term.
Tax Strategies for Roth Conversions
How you carry out your Roth conversion can impact the taxes you’ll pay on it. One way to reduce conversion taxes is through a partial Roth conversion where you spread it out over multiple years rather than all at once. By gradually converting smaller chunks, taxpayers may avoid getting bumped into higher marginal income tax brackets. Spreading a $640,000 conversion over four years, for example, may help utilize more space under lower tax brackets.
Another conversion tax planning strategy is to save them for years in which you have lower income from other sources. As with the gradual conversion strategy, this can keep your income from rising into higher tax brackets and potentially limit your tax liability.
Timing is also a key factor in another approach, but this one doesn’t look specifically at your income. Instead, it aims to convert pre-tax balances during market downturns. The idea is that when account values are depressed, you can move a larger percentage of your 401(k) into a Roth IRA without triggering as large of a tax bill.
401(k)-to-Roth Conversion in Action
Imagine you’re a 60-year-old single filer with $640,000 in a 401(k) and an annual income that places you, at the highest, in the 24% federal tax bracket in 2025. Converting the entire 401(k) this year would add $640,000 to your income. This could push you into the top 37% bracket on every dollar over $609,350.
Instead, let’s consider a gradual conversion. Converting just $128,000 of your 401(k) balance per year over five years would push every dollar over $191,950 into the next-highest bracket of 32%. This can help you avoid the 35% and 37% brackets in the process. (Actual results will vary based on annual tax bracket changes and the inclusion of state-level taxes.)
Now let’s look at what might happen if you converted your 401(k) in a year when the market was down 10%. The $640,000 balance might decline an equivalent amount, falling to $576,000. While this would still put you in the top 37% bracket, taxes on the converted amount would decline quite a bit.
Key Eligibility Rules for 401(k)-to-Roth Conversions
Eligibility rules determine when and how 401(k) savings can be moved into a Roth IRA. Workplace plans set their own guidelines, so the first step is understanding whether the plan allows in-service withdrawals. Some plans permit active employees to move a portion of their balance to an IRA while still working. Meanwhile others restrict any movement until employment ends. These rules govern when a conversion can take place.
There is no income ceiling for converting pre-tax savings to a Roth IRA. Anyone with a traditional IRA or 401(k) balance can complete a conversion regardless of their earnings for the year. This differs from Roth IRA contribution rules, which do impose income limits, and makes conversions accessible to a broad range of savers.
The tax treatment depends on the type of funds held in the 401(k). Pre-tax contributions, employer matches and rollover dollars are taxable when converted. After-tax contributions can also be converted, but only the earnings on those contributions are subject to tax. This distinction shapes how much of the conversion will be taxable and can influence decisions about timing or size.
Converted dollars become subject to Roth IRA distribution rules. Each conversion starts a separate five-year clock that must run before the converted amount can be withdrawn without penalty if the account owner is under age 59½. This matters for anyone planning to tap converted funds soon after retirement.
Making the Call
Converting a 401(k) to a Roth IRA may not always be the right move. Before converting, you should consider your own retirement planning and anticipate whether decades of future Roth growth could outweigh conversion taxes owed now.
Generally speaking, those nearing retirement may not benefit as much as someone who converted earlier in their career when they were in a lower tax bracket. It’s also key to work out projections with a financial advisor mapping out various partial conversion scenarios. This analysis can reveal the optimal pace and amounts to convert each year to maximize outcomes.
Bottom Line
Converting a 401(k) to a Roth IRA triggers unavoidable taxes, but paced-out partial conversions may reduce the burden. Converting in years when income is down or the market has declined significantly may also help lower the overall tax bill. Generally speaking, weighing time horizons and projecting tax bracket impacts can inform conversion decisions. A financial advisor can provide insights on how to best manage your retirement accounts.
Retirement Planning Tips
- A financial advisor can help build a long-term retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s retirement calculator to estimate how much money you could have by the time you retire. The tool also shows you how much you may want to save every month to support your lifestyle in retirement.
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