Tax Rules & Benefits of Rolling Over a 401(k) to Roth IRA
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Leaving a job often raises the question of what to do with your old 401(k). One option is rolling it into a Roth IRA, which can give you tax-free withdrawals in retirement and more control over your investments. But moving pre-tax 401(k) money into a Roth IRA comes with an immediate tax bill.
Why a 401(k) to Roth IRA Rollover Works Differently
A traditional 401(k) is funded with pre-tax dollars. Your contributions reduce your taxable income, and you do not pay tax until you withdraw the money on retirement. A Roth IRA flips that around. You contribute after-tax money, and in return, withdrawals in retirement (after age 59 and a half and once the account has been open for at least five years) are tax-free.
When you roll over a traditional 401(k) to a Roth IRA, the IRS treats the entire transfer as taxable income in that year. In other words, you will owe income taxes on the balance at your current tax rate. This is why many people choose to make the move during a year when their income is temporarily lower.
The Tax Bill: What to Expect
The amount you convert is added to your taxable income for the year. Federal tax rates currently range from 10% to 37%, so the size of your rollover can quickly bump you into a higher bracket. If your 401(k) contains after-tax contributions, you may be able to separate those funds and avoid extra taxes on that portion.
If your 401(k) is already a Roth 401(k), rolling into a Roth IRA is simpler. Since those contributions were made with after-tax dollars, the transfer itself is not taxable.
Do Not Overlook the 5-Year Rule
Roth IRAs come with a five-year rule. You must hold the account for at least five years before withdrawing earnings tax-free, even if you are already over age 59 and a half. Converted funds follow the same rule, meaning that if you roll a traditional 401(k) into a Roth IRA, those dollars cannot be withdrawn penalty-free until five years have passed.
If you already have an established Roth IRA, the waiting period may be less of a concern, since all funds in the account share the same timeline.
How to Do a Rollover Correctly
The easiest way to move funds is through a direct rollover, also called a trustee-to-trustee transfer. You will open a Roth IRA with a bank or brokerage, then instruct your 401(k) plan administrator to send the money directly into it.
Avoid taking possession of the money yourself. If a check is made out to you instead of the new account, the IRS may treat it as a distribution, which could trigger withholding taxes and penalties. If an indirect rollover is your only option, remember that you have 60 days to deposit the full balance into your Roth IRA or face taxes and possibly a 10% early withdrawal penalty.
Income Limits Do Not Apply to Rollovers
Roth IRAs normally come with income caps that restrict high earners from contributing directly. For example, in 2025, eligibility phases out for single filers once modified adjusted gross income reaches $165,000. But rollovers are not subject to these limits. That makes a rollover particularly appealing for higher-income workers who expect to stay in a high tax bracket throughout retirement.
Other Paths for Your 401(k)
A Roth rollover is not your only choice. You can transfer your balance to a new employer’s 401(k), move it into a traditional IRA to delay taxes, or leave it with your old employer if the plan allows. What you should not do, in most cases, is cash it out. Early withdrawals from a traditional 401(k) are taxed as income and may carry a 10% penalty if you are under age 59 and a half.
Bottom Line
Rolling a 401(k) into a Roth IRA can be a smart move, offering tax-free income in retirement, no required minimum distributions, and broader investment choices. But the upfront tax bill is significant, and the five-year rule adds another layer of planning. Consulting a financial planner or tax advisor can help ensure your rollover decision pays off in the long run.