Converting 401k to Roth IRA: Should You Do It?

Key Takeaways

• Converting a 401k to a Roth IRA is a taxable event — the pre-tax balance becomes ordinary income.
• It makes sense in low-income years; it rarely makes sense in peak earning years.
• A direct rollover avoids the 20% withholding that applies to indirect rollovers.

The Conversion Mechanics

Moving money from a Traditional 401k to a Roth IRA is a conversion, not a rollover: the pre-tax dollars become taxable income in the year of the move, and the balance then grows tax-free forever. The math is identical to a Roth IRA conversion of an IRA balance. For 2026, a $100,000 conversion in the 24% bracket costs $24,000 in federal tax — and that bill is due with your tax return, not spread over time. You can pay it from cash or elect withholding from the converted amount, but withholding reduces the balance that compounds tax-free (and can trigger the 10% early distribution penalty if you are under 59½ and the withholding is treated as a distribution). The cleanest execution is a direct rollover from the 401k to the Roth IRA custodian with taxes paid from outside cash.

When It Makes Sense

• Low-income years: between jobs, on sabbatical, or in early retirement before RMDs — converting at 12% beats paying 24% later.
• Small balances: converting a $10,000 old 401k is a manageable tax event that buys decades of tax-free growth.
• RMD management: reducing pre-tax balances shrinks future Required Minimum Distributions (age 73, or 75 if born 1960+).
• Legacy planning: Roth accounts pass to heirs tax-free under the 10-year inherited rule.

When It Does Not

• Peak earning years: converting at 32-37% requires a heroic future rate assumption to break even.
• You need the tax cash: if paying the tax means liquidating other investments, the drag usually outweighs the benefit.
• You may need the money soon: the five-year clock on converted amounts restricts access before 59½.
• Medicare surcharges: a large conversion can push income over IRMAA thresholds (roughly $106,000 single / $212,000 married for 2026), raising Part B and D premiums for two years.

Action Steps

1. Estimate the tax bill: marginal rate × converted amount, plus any state tax.
2. Compare against your projected retirement tax rate — the calculator on the home page models the break-even.
3. Use a direct rollover and pay the tax from outside funds.
4. If converting a 401k, check whether the plan allows a direct Roth conversion or requires a two-step (401k → Traditional IRA → Roth).

Worked Example: The Gap-Year Conversion

Nina, 45, has a $120,000 Traditional 401k. She takes a two-year career break and her taxable income drops to $20,000 per year — squarely in the 12% bracket. Over the two gap years she converts $50,000 each year: the first $27,000 or so fills the 12% bracket (after the standard deduction) and the remainder spills into the 22% bracket. Her total federal tax on $100,000 of conversions is roughly $17,000-$19,000 — an effective rate near 18%, versus the 32% she pays while working, a saving of roughly $14,000, and the converted $100,000 now grows tax-free in a Roth for the next 20 years. When she returns to work at $180,000, she simply stops converting. The gap-year conversion is the single highest-leverage retirement move available to mid-career professionals — the key is having the cash to pay the tax and the discipline to convert before the income returns.

When It Makes Sense to Convert

A 401k-to-Roth conversion is most attractive when you are in an unusually low tax year — between jobs, on sabbatical, or retired before claiming Social Security. In those years your taxable income may drop by a bracket or two, letting you convert at 12% or 22% instead of your normal 32%+. The math on a $100,000 conversion: at 22% you owe $22,000 in tax; at 12% you owe $12,000 — a $10,000 saving that compounds tax-free for decades. Conversions also make sense for high earners who expect RMDs to push them into higher brackets at 73, for those who want to leave tax-free money to heirs, and for anyone who wants to eliminate future RMDs on that balance. The cost is the tax bill itself — if you must pay it from the converted amount, roughly 20-25% of the balance disappears, so paying from cash outside the IRA is strongly preferred. Run a marginal-rate comparison before committing.