Roll over your 401(k) to a Roth IRA
You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free. Any additional contributions and earnings can grow tax-free. You are not required to take RMDs. You may have more investment choices than what was available in your former employer's 401(k).
You can shift money into a Roth IRA from a traditional IRA or 401(k) by doing a Roth IRA conversion. The amount you convert is added to your gross income for the tax year in which you make the switch. Tax rates in 2025 range from 10% to 37%, and the conversion amount could push you into a higher tax bracket.
It might absolutely be a good financial decision to rollover a traditional 401k to a Roth IRA for some people. You are paying taxes this year, yes, but afterwards, that money will grow tax-free and when you withdraw it, you will not be taxed on it again.
Many people roll over their 401(k) savings when they change jobs or retire. However, numerous 401(k) plans allow employees to transfer funds to an IRA while they are still with their employer. A lot of people only think about rolling over their 401(k) savings into an IRA when they change jobs.
If you decide to roll over your entire 401(k) balance, you can roll all your pre-tax dollars into a traditional IRA and all your nondeductible contributions into a Roth IRA. You wouldn't pay taxes on this type of conversion because you already paid taxes on your nondeductible contributions the year you made them.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
If you have a Roth 401(k), you cannot contribute more than what you earn at the company that holds your plan. With most retirement accounts, you can't access the money you contribute or any investment earnings before retirement age without incurring a 10% early withdrawal penalty, plus any applicable income taxes.
The simple version says the Roth account needs to have been funded for five years before you withdraw any earnings—even after you've reached age 59½—or you could owe taxes. In addition, nonqualified withdrawals before that age could also trigger a 10% penalty.
Key Takeaways
You will owe income taxes on the money you roll over from a traditional 401(k) to a Roth IRA that year, but you'll owe no taxes on withdrawals after you retire–if you retire at 59½ years of age or older and you've owned this or another Roth IRA for at least five years.
Let's say you open a Roth IRA and contribute the maximum amount each year. If the base contribution limit remains at $7,000 per year, you'd amass over $100,000 (assuming a 8.77% annual growth rate) after 10 years. After 30 years, you would accumulate over $900,000.
The key disadvantage of a Roth conversion is that taxes are due on the converted value. There are also factors to consider specifically for the year of conversion.
You can still contribute to a Roth IRA (individual retirement account) and/or a traditional IRA as long as you meet the IRA's eligibility requirements. It usually makes sense to contribute enough to your 401(k) account to get the maximum matching contribution from your employer.
As a general rule, if you withdraw funds before age 59 ½, you'll trigger an IRS tax penalty of 10%. The good news is that there's a way to take your distributions a few years early without incurring this penalty. This is known as the rule of 55.
Completing the actual conversion of funds from a traditional IRA account to a Roth IRA account won't cost you anything, but you will be required to pay income taxes on the amount distributed from the traditional IRA or 401(k).
You can also convert traditional 401(k) balances to a Roth IRA. Generally, you'll only be able to transfer a 401(k) to a Roth IRA if you are rolling over your 401(k), the plan allows in-service withdrawals, or the plan allows in-plan conversions.
The short answer is that yes, you can withdraw money from your 401(k) before age 59 ½. However, early withdrawals often come with hefty penalties and tax consequences.
Key Takeaways. Even with its drawbacks, the 401K can be a valuable tool in your retirement toolkit. The tax-deferred growth, employer matching, and compounding interest you can earn over time make it a powerful option—though it's far from perfect.
Another important disadvantage is the income restriction. People with very high MAGI are not eligible for Roth IRA. Also, the contributions that can be made are limited by the account owner's income. He/She cannot make contributions that are higher than the limit set by the IRS, based on the owner's MAGI.
One way to save more each year is to contribute to a Roth individual retirement account (IRA) in addition to an employer's 401(k) plan. Not only is having both a Roth IRA and a 401(k) allowed by the IRS, but having both could also help you build a bigger nest egg.
For single filers, in 2024 your Modified Adjusted Gross Income (MAGI) must be under $146,000. In 2025 your MAGI must be under $150,000 to make a full Roth IRA contribution. For joint filers, in 2024 your MAGI must be under $230,000.
Do you pay taxes twice on 401(k) withdrawals? We see this question on occasion and understand why it may seem this way. But, no, you don't pay income tax twice on 401(k) withdrawals. With the 20% withholding on your distribution, you're essentially paying part of your taxes upfront.
You can do a 401(k) withdrawal while you're still employed at the company that sponsors your 401(k), but you can only cash out your 401(k) from previous employers. Learn what do with your 401(k) after changing jobs.
This is where the rule of 55 comes in. If you turn 55 (or older) during the calendar year you lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty. However, you must still pay taxes on your withdrawals.