Should I Convert My 401(k) to a Roth IRA?

Converting money from a traditional 401(k) to a Roth IRA can create more flexibility in retirement, but the conversion generally increases your taxable income in the year it is completed.

A Roth conversion may be worth evaluating if you expect your future tax rate to be higher, want to reduce future required distributions, or have lower income years before Social Security and required distributions begin. However, converting too much can increase your current tax bill, affect Medicare premiums, reduce health insurance subsidies, or cause more of your Social Security benefits to become taxable.

There is no conversion amount that is right for everyone. The decision should be based on a multiyear retirement and tax analysis.

What Is a Roth Conversion?

A Roth conversion moves money from a pretax retirement account into a Roth account.

The money may come from:

1. A traditional IRA
2. A traditional 401(k)
3. A traditional 403(b)
4. Another eligible pretax retirement plan

The taxable portion of the amount converted is generally included in your ordinary income for that calendar year.

After the conversion, the money is held in a Roth IRA. Qualified Roth IRA distributions are generally not included in federal taxable income.

According to the IRS, income limits that restrict direct Roth IRA contributions do not generally prevent someone from converting a traditional IRA or eligible retirement plan into a Roth IRA. IRS Roth IRA guidance

How Is a 401(k) to Roth IRA Conversion Taxed?

If your entire 401(k) balance consists of pretax contributions and earnings, the full amount converted is generally added to your taxable income.

For example, suppose you convert $50,000 from a pretax 401(k) to a Roth IRA. The $50,000 is generally included in your taxable income for that year.

That does not mean you pay $50,000 in taxes. Your actual tax depends on factors including:

1. Your other income
2. Your deductions
3. Your filing status
4. Your federal tax bracket
5. State income taxes
6. Capital gains
7. Social Security income
8. Available credits

If part of the account contains money that has already been taxed, the calculation may be different. A qualified tax professional should determine the taxable amount.

Can You Convert a 401(k) Directly to a Roth IRA?

In many situations, an eligible distribution from a traditional 401(k) can be moved directly into a Roth IRA. The pretax portion is generally included in income.

Your options depend on the employer plan.

If the 401(k) is with a former employer, the plan may allow a direct rollover to a Roth IRA. Another option may be to roll the 401(k) into a traditional IRA and then complete partial Roth conversions over time.

If the 401(k) is with your current employer, the plan may restrict withdrawals or rollovers while you are still employed. Some plans permit an in plan Roth conversion, while others do not.

Review the plan document and speak with the plan administrator before beginning the transaction. The IRS provides a retirement plan rollover chart showing which account types may be moved into other retirement accounts.

Potential Benefits of a Roth Conversion

Qualified Withdrawals May Be Tax Free

Qualified Roth IRA distributions are generally not included in federal taxable income. This can provide a source of retirement income that is treated differently from withdrawals from traditional IRAs and 401(k) accounts.

Roth IRAs Do Not Require Distributions During the Owner’s Lifetime

Traditional retirement accounts are generally subject to required minimum distribution rules. Roth IRA owners are not required to take distributions during their lifetimes.

Beneficiaries are still subject to inherited account distribution rules.

Review the IRS required minimum distribution guidance for current rules.

Greater Tax Diversification

Holding taxable, pretax, and Roth accounts may provide more choices when creating retirement income.

For example, a retiree may be able to choose among:

1. Taxable investment accounts
2. Traditional IRA or 401(k) withdrawals
3. Qualified Roth IRA distributions
4. Social Security
5. Pension income

Having multiple account types does not eliminate taxes, but it may provide more flexibility when deciding which accounts to use.

Potentially Smaller Future Required Distributions

Converting part of a traditional IRA or 401(k) reduces the amount remaining in the pretax account. This may result in smaller required minimum distributions later.

Whether that benefit outweighs the current conversion tax depends on the individual situation.

Important Roth Conversion Risks

The Conversion May Push You Into a Higher Tax Bracket

A conversion increases taxable income. A large conversion could cause part of your income to move into a higher marginal tax bracket.

This does not necessarily mean the entire conversion is taxed at the higher rate. Federal tax brackets apply incrementally. However, the conversion should be modeled before it is completed.

Medicare Premiums May Increase

Higher income can increase Medicare Part B and Part D premiums through the Income Related Monthly Adjustment Amount, commonly called IRMAA.

Medicare generally uses income information from two years earlier. Therefore, a Roth conversion completed in 2026 could generally affect Medicare premiums in 2028.

Review the current Medicare income related premium information before completing a conversion.

Marketplace Health Insurance Savings May Be Affected

If you are under age 65 and receive health insurance through the Marketplace, a Roth conversion may increase your household income and reduce your eligibility for premium tax credits or other savings.

Marketplace savings are based on expected household income for the coverage year. HealthCare.gov includes most taxable IRA and 401(k) withdrawals when calculating income. HealthCare.gov income guidance

This can be especially important for someone retiring before Medicare eligibility.

More of Your Social Security May Become Taxable

A Roth conversion can increase the combined income used to determine whether Social Security benefits are taxable.

Depending on income and filing status, up to 85 percent of Social Security benefits may be included in taxable income. This does not mean Social Security is taxed at an 85 percent tax rate.

If you already receive Social Security, the conversion analysis should include its potential effect on the taxable portion of your benefits. Review the IRS Social Security income guidance for more information.

A Conversion Cannot Generally Be Undone

Roth conversions completed after 2017 cannot generally be recharacterized back into a traditional IRA.

This makes tax projections and careful execution particularly important. Once the conversion has been completed, a market decline does not allow you to reverse it.

The Five Year Rules May Apply

A qualified Roth IRA distribution generally requires meeting a five year holding period and an additional qualifying condition, such as reaching age 59½.

Separate five year rules may also apply to converted amounts, particularly for someone who withdraws conversion funds before age 59½.

The rules can be complicated when someone has multiple Roth contributions and conversions. Review the IRS Form 8606 instructions and consult a tax professional before withdrawing recently converted funds.

Nondeductible IRA Contributions Can Complicate the Calculation

If you have made nondeductible contributions to a traditional IRA, part of a Roth conversion may be taxable and part may not be taxable.

The calculation generally considers the value and tax basis of all traditional IRAs, including applicable SEP and SIMPLE IRAs. You usually cannot select only the after tax dollars and convert them while ignoring other traditional IRA balances.

IRS Form 8606 is used to report nondeductible IRA contributions and traditional IRA conversions.

When Might a Roth Conversion Make Sense?

A Roth conversion may be worth evaluating when:

1. You retire before Social Security begins
2. Your current income is temporarily lower
3. You have several years before required minimum distributions begin
4. You expect future required distributions to be substantial
5. You believe future marginal tax rates may be higher
6. You want additional flexibility when creating retirement income
7. Your investment balance has declined and you can convert more shares at a lower account value
8. You can pay the conversion tax without weakening your retirement plan

These situations do not automatically mean someone should convert. Each conversion should be evaluated based on its total financial effect.

When Might a Roth Conversion Not Make Sense?

A conversion may be less attractive when:

1. Your current marginal tax rate is unusually high
2. You expect to be in a lower tax bracket later
3. The conversion would significantly increase Medicare premiums
4. The conversion would reduce valuable Marketplace health insurance savings
5. You need the retirement account to pay the conversion tax
6. You expect to use the money soon and may not satisfy applicable holding period rules
7. You plan to leave pretax retirement assets to charity
8. The conversion would create an estimated tax or cash flow problem

The decision should consider more than the immediate federal tax bracket.

How Much Should You Convert to a Roth IRA?

There is no universal conversion amount.

A Roth conversion analysis should consider:

1. Projected taxable income
2. Federal and state tax brackets
3. Deductions and credits
4. Capital gains
5. Social Security taxation
6. Medicare IRMAA
7. Marketplace health insurance
8. Required minimum distributions
9. Available cash to pay taxes
10. Future retirement income needs

Rather than converting the entire account at once, some people evaluate partial conversions over several years. This may provide more control over taxable income, but a multiyear strategy is not automatically better for everyone.

Hypothetical Roth Conversion Example

Assume a married couple retires at age 62 with $900,000 in pretax retirement accounts. They plan to delay Social Security and have several years before required minimum distributions begin.

Instead of assuming a particular conversion amount, they could compare several scenarios:

The analysis would estimate how each scenario affects:

1. Current federal and state income taxes
2. Marketplace health insurance before Medicare
3. Future Medicare premiums
4. The taxable portion of Social Security
5. Future required minimum distributions
6. The remaining traditional and Roth account balances
7. Total projected taxes over retirement

This example is hypothetical and is not a recommendation to convert any specific amount.

Can You Complete a Roth Conversion After Required Distributions Begin?

Yes, but any required minimum distribution for the year generally must be taken first.

A required minimum distribution cannot be converted to a Roth IRA. After satisfying the required distribution, an additional eligible amount may be converted.

How Pearl Wealth Group Approaches Roth Conversion Planning

At Pearl Wealth Group, Roth conversions are evaluated as part of the complete retirement plan.

Through Your Financial EKG™, we can compare conversion scenarios while considering:

1. Retirement income
2. Investment withdrawals
3. Social Security timing
4. Required minimum distributions
5. Medicare and healthcare
6. Taxable investment income
7. Longevity assumptions
8. Legacy goals

Pearl Wealth Group does not provide tax or legal advice. We encourage clients to review Roth conversion strategies with a qualified tax professional before implementation.

Frequently Asked Questions About Roth Conversions

Is a Roth conversion taxable?

The pretax portion of a traditional IRA or 401(k) conversion is generally included in ordinary taxable income for the year of conversion.

Is there an income limit for Roth conversions?

Income limits that apply to direct Roth IRA contributions do not generally prevent someone from completing a Roth conversion.

Is there a limit on how much I can convert?

There is no general annual dollar limit on Roth conversions. However, the amount converted affects taxable income and may affect other areas of your financial plan.

Should I convert my entire 401(k) at once?

Not necessarily. A full conversion can create a substantial tax bill. Partial conversions over multiple years may be worth evaluating, but the appropriate strategy depends on the individual plan.

Can I convert my current employer’s 401(k)?

It depends on the plan. Some employer plans permit in plan Roth conversions or distributions while employed, while others require a qualifying event before money can be moved.

Can I undo a Roth conversion?

Conversions completed after 2017 cannot generally be recharacterized back into a traditional IRA.

Does a Roth conversion affect Medicare premiums?

It can. A conversion increases adjusted gross income and may affect income related Medicare premiums generally calculated using income from two years earlier.

Does a Roth conversion affect Social Security taxation?

It can. The taxable conversion may increase combined income and cause a greater portion of Social Security benefits to be included in taxable income.

How do I pay the tax on a Roth conversion?

Taxes may be paid through withholding, estimated tax payments, or other available funds. Withholding taxes from the converted retirement account reduces the amount reaching the Roth IRA and may create additional tax consequences. Consult a tax professional before choosing a payment method.

Are Roth IRA withdrawals always tax free?

No. Qualified Roth IRA distributions are generally federally income tax free. Distributions that do not meet the applicable requirements may be taxable or subject to an additional tax.

Take the Next Step

A Roth conversion should be coordinated with your retirement income, investments, Social Security, healthcare, and tax planning.

If you would like help evaluating how Roth conversions may fit within your retirement strategy, contact Pearl Wealth Group to discuss Your Financial EKG™.

Schedule a conversation with Pearl Wealth Group

This article is provided for general educational and informational purposes only. It should not be considered personalized investment, tax, or legal advice. Tax, retirement, Medicare, and healthcare rules can change. Consult qualified financial and tax professionals regarding your individual circumstances.