401(k) rollover glossary
Roth Conversion
A Roth conversion moves pre-tax retirement money (Traditional IRA or 401k) into a Roth IRA. You pay income tax on the converted amount today — in exchange for tax-free growth and withdrawals in retirement.
A Roth conversion is the act of moving pre-tax retirement funds (from a Traditional IRA, Traditional 401(k), or similar pre-tax account) into a Roth IRA. The converted amount is added to your taxable income for the year and taxed at your ordinary income rate. After conversion, the money grows tax-free and qualified withdrawals in retirement are not taxed.
When rolling over a 401(k) after leaving a job, you face a choice: roll to a Traditional IRA (no current tax, deferred until withdrawal) or roll to a Roth IRA (pay tax now, tax-free forever). The right answer depends on your current tax bracket, your expected retirement tax bracket, your timeline, and whether you can pay the conversion tax from outside the retirement account.
A partial conversion — converting only a portion each year — is often optimal. By converting just enough to fill your current tax bracket without pushing into the next bracket, you spread the tax bill over multiple years and keep the total tax cost lower.
Roth conversions are subject to the Alternative Minimum Tax (AMT). A large conversion can push your income into AMT territory, where the effective tax rate can be higher than your regular bracket. The nesthelm AMT modeling tool estimates the impact for your specific income level.
If you have a mix of pre-tax and after-tax IRA balances, be aware of the pro-rata rule: conversions are taxed proportionally based on the ratio of pre-tax to total IRA balance. You cannot selectively convert only the after-tax portion without triggering tax on the pre-tax portion.
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Frequently asked questions
- Can I undo a Roth conversion if it turns out to be a mistake?
- No. Since 2018, Roth recharacterizations (undoing conversions) are no longer allowed under the Tax Cuts and Jobs Act. Once you convert, the tax is owed. Plan carefully before converting large amounts.
- Is there a limit on how much I can convert each year?
- There is no annual limit on Roth conversions. You can convert as little or as much as you want in a given year. The constraint is the resulting tax bill — large conversions in a single year can push you into higher brackets or trigger AMT.
- If I'm rolling over a 401(k) to a Roth IRA, do I need to open the Roth IRA first?
- Yes. You need to have an open Roth IRA at the destination custodian before initiating the rollover. The destination account must be a Roth IRA — not a Traditional IRA.
Related terms
This glossary entry provides educational information based on IRS rules. It is not tax or legal advice for your specific situation.