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.
Generally it's best to rollover an old 401k to an IRA. However, one notable exception is if you currently or plan to make backdoor Roth IRA contributions. If you rollover a 401k to an IRA, you can't make backdoor Roth contributions (due to the pro-rata rule) unless you rollover the IRA balance first.
To answer your question, while the amount of pre-tax funds converted to a Roth IRA is subject to earned income tax the year the conversion takes place, there are no penalties for processing a Roth conversion.
You'd owe income tax on the entire amount that you convert from a traditional IRA into a Roth IRA in the year you make the switch. The amount of tax will depend on your income tax bracket and income tax rate—between 10% and 37% for 2025. 1 The money you convert is added to your gross income for the tax year.
A Roth IRA conversion is a taxable event. If your state has an income tax, the conversion will generally be treated as taxable income by your state as well as by the federal government.
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.
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.
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.
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.
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.
You're never too old to fund a Roth IRA. The earlier you start a Roth IRA, the longer you have to save and take advantage of compound interest. Even when you're close to retirement or already in retirement, opening this special retirement savings vehicle can still make sense under some circumstances.
That depends entirely on your personal situation and goals. As a threshold matter, staggering this conversion is generally a good idea. Moving your 401(k) 10% at a time will help keep each year's income in a lower bracket, so that you pay high rates on as little of this income as possible.
Rollover FAQs
You can roll over money from a 401(k) to an IRA without penalty but must deposit your 401(k) funds within 60 days. However, there will be tax consequences if you roll over money from a traditional 401(k) to a Roth IRA.
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.
Key takeaways. The Roth IRA contribution limit for 2024 is $7,000 for those under 50, and $8,000 for those 50 and older. In 2025, the Roth IRA contribution limit is the same as for 2024 at $7,000 for those under 50, and $8,000 for those 50 and older.
If you have a traditional 401(k) or 403(b), you can roll over your money into a Roth IRA. However, this would be considered a "Roth conversion," so you'd have to report the money as income at tax time and pay ordinary income tax on it.
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.
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.
An obvious disadvantage of a Roth IRA is its non-tax-deductible contributions. However, it can be offset by its tax-free distributions, especially when the future marginal tax rate is expected to be higher than the current marginal tax rate.
As previously noted, the 5-year aging rule applies to inherited Roth IRAs as well, and rules around them can be complicated. To make qualified distributions, it must be 5 years since the beginning of the tax year when the original account owner made the initial contribution, even if the new owner is 59½ or older.
A Roth IRA has many great aspects, but one of the most noticeable downsides is the relatively low contribution limit. The most you can contribute to an IRA in 2024 (both Roth and traditional combined) is $7,000, or $8,000 if you're 50 or older. At $7,000 annually, it would take you over 142 years to reach $1 million.