Quick answer

Converting a traditional 401(k) to a Roth IRA (or to a Roth account inside your plan) means you’ll pay ordinary income tax on pre-tax balances today in exchange for tax-free growth and withdrawals later. That trade-off can be powerful if you expect higher tax rates in retirement, want to avoid required minimum distributions (RMDs) from Roth IRAs, or need to manage future tax exposure. But conversions also raise your current-year taxable income, can trigger higher Medicare premiums (IRMAA) or Social Security taxation, and may be a costly move if done without planning (IRS guidance: https://www.irs.gov/retirement-plans/roth-iras).

Why this matters

Tax policy and your personal situation determine whether a conversion helps or hurts. The core question: will the taxes you pay now be lower than the taxes you would have paid on withdrawals in retirement? Answering that requires looking at current tax brackets, projected retirement income, state tax rules, and short-term liquidity to pay conversion taxes.

Pros (Why people convert)

  • Tax-free withdrawals in retirement: Qualified Roth IRA distributions are tax-free, including earnings, if rules are met (age 59½ and the account has been open at least five years). This can be especially valuable if you expect higher marginal tax rates later (IRS: https://www.irs.gov/retirement-plans/roth-iras).
  • No lifetime RMDs for Roth IRA owners: Unlike traditional IRAs and 401(k)s, Roth IRAs are not subject to required minimum distributions during the original owner’s lifetime, which preserves tax-free compounding and gives more flexibility for estate planning (IRS RMD rules: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions).
  • Tax diversification: Holding both pre-tax and Roth accounts gives options to manage taxable income in retirement and can reduce taxes on Social Security and Medicare premiums.
  • Estate planning benefits: Heirs inherit Roth IRAs that can provide tax-free distributions (subject to post-death distribution rules), which can reduce future tax burdens for beneficiaries.
  • Convert in low-income years: Converting during a year with unusually low income (job loss, sabbatical, large deductions) can mean paying taxes at a lower marginal rate.

Cons (Why conversions can backfire)

  • Immediate tax bill: The converted amount is added to taxable income for the year and taxed at ordinary rates. That can push you into a higher bracket and create a large, one-time tax liability.
  • Impact on Medicare and benefits: A big conversion can raise your Modified Adjusted Gross Income (MAGI), increasing Medicare Part B/D premiums (IRMAA) and possibly the taxation of Social Security benefits.
  • Liquidity and penalty risk: If you pay conversion taxes from the converted funds inside the retirement account, you reduce the benefit of the conversion and could incur penalties if under age 59½ and you withdraw amounts within five years. Best practice is to pay conversion taxes from outside retirement savings.
  • State taxes: State income tax may apply to the conversion; states vary widely in how they treat Roth conversions.
  • Opportunity cost: Paying taxes now means less money working in the account. If your investments grow more slowly than expected or tax law changes favor traditional accounts, you may lose value.

How a 401(k) to Roth conversion actually works (step-by-step)

  1. Confirm plan rules: Check whether your employer plan allows in-plan conversions or distributions/rollovers to a Roth IRA. Some plans permit a direct conversion to a Roth 401(k), others permit rollovers to a Roth IRA; some require distribution first.
  2. Decide amount to convert: You can convert all or part of your 401(k) balance. Partial conversions let you manage tax brackets across years.
  3. Execute the transfer: You may do an in-plan rollover to a Roth 401(k) or a direct rollover to a Roth IRA. A direct trustee-to-trustee rollover avoids mandatory withholding and reduces administrative risk.
  4. Pay the tax: The pre-tax portion becomes taxable income. Ideally pay taxes from outside retirement accounts to preserve the conversion’s compounding effect.
  5. Observe the 5‑year rules: Each Roth conversion has timing consequences. Conversions are subject to a five-taxable-year rule for avoidance of the 10% early distribution penalty on converted amounts if withdrawn before satisfying the rule and before age 59½. Also, Roth IRAs require that the account be open at least five years before earnings are withdrawn tax-free (IRS Roth IRA rules).

Key tax rules and traps to watch

  • No income limits on conversions: Since 2010, there is no IRS income limit preventing you from converting a traditional account to a Roth. (IRS: Roth IRAs).
  • Tax year impact: Converted amounts are taxed in the year the conversion is completed. That can affect state tax returns, estimated tax payments, and withholding.
  • Medicare IRMAA: Large conversions can increase MAGI and raise Medicare Part B/D premiums for up to two years.
  • Social Security taxation: Higher reported income can increase the portion of Social Security benefits that are taxed.
  • Withholding vs estimated taxes: Employer plans sometimes withhold taxes from distributions. Withholding out of the converted amount reduces the capital available to convert and may create withholding shortfalls; consider estimated tax payments instead.

When conversions make sense (common scenarios)

  • You’re in a low-income year: Job change, parental leave, back-to-school, or temporarily reduced income creates a window to convert at a low marginal rate.
  • You expect higher future tax rates: If you reasonably expect to be in a higher bracket in retirement, a conversion locks in today’s lower tax rate.
  • You want to eliminate RMDs from taxable accounts: Converting some balances to Roth allows you to avoid future RMDs from those buckets.
  • You have a long time horizon: Younger savers or those with many years until retirement benefit more from decades of tax-free compounding.

When to be cautious or avoid conversion

  • You’ll need the money to pay the conversion tax: If you must use retirement funds to pay the tax, the conversion can be counterproductive and might trigger penalties.
  • Near-term high tax exposure: If a conversion pushes your income into a higher tax bracket or creates large Medicare premium increases, it may not be worth it.
  • Short investment horizon: People close to retirement may not have time to recover the upfront tax cost via tax-free growth.

Practical planning strategies

  • Partial, multi-year conversions: Spread conversions over several years to avoid bracket creep and limit IRMAA bumps.
  • Use low-income windows: Convert during retirement years before taking significant Social Security benefits or pension payments.
  • Coordinate with other tax moves: Harvest capital losses, make charitable donations, or time large deductible expenses to offset conversion income.
  • Watch state residency: If you plan to move to a no-income-tax state, delay conversions until after the move to avoid state taxes.

Examples (illustrative)

Example 1 — Single, low-income year
Angela has $200,000 in a 401(k). She loses part-time work and expects taxable income of $20,000 this year. Converting $50,000 while remaining in a low bracket costs her ordinary tax on $50,000 now but might save far more later if taxes rise.

Example 2 — Big conversion misstep
Mike converts $300,000 in one year, pushing his taxable income into a top bracket and triggering higher Medicare IRMAA surcharges. He also paid taxes using converted funds inside the account, reducing the benefit and creating liquidity stress.

Common mistakes to avoid

  • Letting withholding eat the conversion: Don’t let your plan withhold conversion taxes from the converted amount; pay taxes from outside funds or use estimated taxes.
  • Forgetting the 5‑year rule: Removing converted funds too early can lead to penalties.
  • Ignoring state tax: Check state rules — some states tax conversions differently or phase out favorable treatment.
  • Treating conversions as a tax shelter: They’re a timing decision, not a way to permanently avoid taxes.

Checklist before you convert

  • Confirm plan allows conversion/rollover.
  • Model the tax cost for the conversion year and future years.
  • Estimate IRMAA and Social Security impacts.
  • Ensure you can pay taxes from non-retirement funds.
  • Decide partial vs full conversion and timeline.
  • Talk to a tax pro or CFP to coordinate.

Where to learn more (authoritative sources)

Related FinHelp guides

Professional note and disclaimer

I’ve worked with clients for 15+ years on Roth conversion planning and routinely use partial conversions and low-income windows to improve after-tax retirement income. This article explains common trade-offs and strategies but is educational only. Talk with a qualified tax professional or financial advisor about your specific situation before converting—tax law and personal circumstances change outcomes.