Converting a 401(k) to a Roth IRA? Here's how the tax bill gets calculated, direct vs. indirect rollovers, the 5-year rules and what happens next.
Rolling assets from a 401(k) with a former employer into a Roth IRA sounds simple until you hit the fine print.
Which type of 401(k) you have would change your tax bill entirely. One rollover method carries a hidden 20% trap. The money doesn't invest itself once it arrives.
This guide walks through all of it, in order.
Note: The information provided here is for general informational purposes only. It is not intended to serve as formal tax advice. Please consult a qualified tax advisor for guidance tailored to your specific financial situation.
A Roth IRA conversion moves money from a workplace retirement account, like a 401(k), into a personal Roth IRA you control. Instead of pre-tax savings that get taxed on the way out in retirement, you pay tax on the money now and it grows tax-free from that point forward.
That trade-off is the appeal to some. A Traditional 401(k) holds pre-tax dollars: contributions lowered your taxable income while you worked, but every withdrawal in retirement gets taxed as ordinary income. A Roth IRA flips that. You've already paid the tax, so qualified withdrawals in retirement come out completely tax-free.
A few other reasons people make the move:
One thing worth knowing upfront: converting a 401(k) doesn't eat into your annual Roth IRA contribution limit.
As of 2026, that limit is $7,500 (or $8,600 if you're age 50 or older) for direct contributions. Rollover conversions are separate and don't count against that cap, no matter how large the converted balance is.
Rolling the assets into an Individual Retirement Account (IRA) is one of several available options. Depending on your financial goals, tax situation and timeline, you may also consider leaving the funds in your former plan, transferring them to a new employer's 401(k) if permitted or taking a cash distribution (which may carry tax consequences and early withdrawal penalties).
Evaluating these paths side-by-side helps ensure you select a strategy tailored to your situation.
Feature or factor | Option 1: Leave in former 401(k) | Option 2: Roll over to new 401(k) | Option 3: Roll over to an IRA (Roth/Traditional) | Option 4: Cash distribution |
Investment selection | Limited to former employer’s fund menu. | Limited to new employer’s fund menu. | Broad: Individual stocks, ETFs, mutual funds, & multi-asset options. | N/A (Liquidated to cash). |
Fees and expenses | Often lower institutional fund expense ratios. | Depends on new plan fees and fund expense ratios. | Varies by provider; retail fund fees, trading fees, or advisory costs may apply. | None initially, but significant tax/penalty losses. |
Creditor protection | Strong federal protection under ERISA. | Strong federal protection under ERISA. | Varies by state law (generally less protection than ERISA). | None once distributed. |
Early withdrawal penalty exceptions | Rule of 55: Penalty-free distributions if separated from service at age 55+. | Penalty-free withdrawals generally delayed until age 59½. | Penalty-free distributions generally delayed until age 59½ (with specific IRS exceptions). | 10% early withdrawal penalty if under age 59½. |
Loan provision | Usually not available to former employees. | May permit plan loans if allowed by new employer. | Loans are prohibited in IRAs. | N/A |
Immediate tax event | No (Tax-deferred) | No (Tax-deferred). | No if Traditional-to-Traditional / Roth-to-Roth. Yes if converting pre-tax 401(k) to Roth IRA. | Yes. Taxable as ordinary income + 20% federal mandatory withholding. |
The tax treatment depends entirely on whether your 401(k) money was pre-tax or already taxed.
Traditional 401(k) to Roth IRA (a Roth conversion): Your 401(k) holds pre-tax contributions, so moving that money into a Roth IRA converts it from pre-tax to post-tax status. The full converted amount counts as ordinary taxable income in the year you make the transfer.
Roth 401(k) to Roth IRA (a Roth rollover): If your 401(k) already held after-tax Roth contributions, moving them into a Roth IRA is generally tax-free, since both accounts hold post-tax money.
One catch: employer matching funds are almost always contributed pre-tax, even inside a Roth 401(k). Rolling that matched portion into a Roth IRA triggers ordinary income tax, unless you direct it into a Traditional IRA instead.
Traditional 401(k) → Roth IRA | Roth 401(k) → Roth IRA | |
Source funds | Pre-tax | Post-tax |
Tax event | Yes — taxed as ordinary income | Generally no (employer match portion may be taxable) |
RMDs after transfer | None, during owner's lifetime | None, during owner's lifetime |
Once you know which type of conversion applies to you, the next decision is how the money actually moves. There are two methods and one carries meaningfully more risk than the other.
Direct rollover (trustee-to-trustee): Your 401(k) administrator sends the funds straight to your new IRA provider — you never take possession of the money. This is the method the IRS effectively prefers: no withholding and no risk of triggering an early distribution penalty.
Indirect rollover (the 60-day rule): Your 401(k) plan cuts a check directly to you. You then have sixty calendar days to deposit the full amount into your Roth IRA yourself.
The 20% withholding trap By federal law, plan administrators must withhold twenty percent of an indirect distribution for income tax, even if you intend to roll over the full amount. To complete a true 100% rollover, you'll need to make up that missing twenty percent out of pocket within sixty days. Whatever you don't replace gets treated as a taxable distribution, and may trigger a ten percent early withdrawal penalty if you're under age 59½. |
On a $20,000 direct rollover, the full $20,000 goes straight to your IRA.
On a $20,000 indirect rollover, you'd receive a check for $16,000 (the IRS holds back $4,000) and you'd need to come up with that $4,000 yourself within sixty days to deposit the full $20,000 and avoid tax and penalties on the difference.
Given that gap, a direct rollover is almost always the simpler, lower-risk path, unless you have a specific reason to briefly hold the funds yourself.
Contact your current 401(k) plan provider to verify your balance is fully vested and check whether a rollover is available to you right now. If you're still employed, ask specifically whether your plan allows an in-service rollover, since some plans only permit transfers after you leave the company.
Choose a provider that supports the kind of self-directed investing you want and open a Roth IRA account. In the Crypto.com App, eligible users can open a Roth IRA that supports both traditional equities and digital assets.
Investors can trade traditional stocks and digital assets on one unified platform, powered by distinct, specialized entities: equities via Foris Capital LLC US (Member FINRA/SIPC) and digital assets via Crypto.com.
Request a trustee-to-trustee rollover from your 401(k) administrator, giving them your new Roth IRA provider's account details so the funds move directly, without passing through your hands.
Your 401(k) provider will send you Form 1099-R the following January. You'll report the gross distribution and the taxable portion on Form 1040 when you file.
This step has a tendency to get skipped, but it can make a difference. Your rollover lands as uninvested settlement cash. It won't grow until you actively choose and purchase investments with it.
A quick note before you go further: this article explains the mechanics of a rollover, not what to invest in afterward. Consider your own goals, timeline, and risk tolerance — or talk to a qualified financial advisor — before allocating converted funds.
Any Traditional 401(k) balance you convert gets added to your taxable income for that year and taxed at your ordinary marginal rate — there's no special, lower conversion tax rate.
Three IRS forms track the process:
Form 1099-R: Issued by your former401(k) custodian, showing the total distribution amount in Box 1. Direct rollovers may carry distribution Code G, though a taxable Traditional-to-Roth conversion will still show the taxable amount in Box 2a even with that code.
Form 1040: You report the total distribution and the taxable conversion amount on the retirement-income lines of your return, matching what the 1099-R reported.
Form 5498: Issued by your new IRA trustee, confirming the rollover contribution was received. You don't need to do anything with this form other than keep it for your records.
Converting a large balance in a single year can push you into a higher tax bracket, since the entire converted amount lands as income at once. Spreading a large conversion across multiple tax years is one common way people manage that bracket exposure.
That said, the right approach depends on your full financial picture, which may render a conversation with a tax professional essential. State tax treatment of converted balances also varies; check your own state's rules before you file.
Every conversion starts its own five-year timer, ticking from January 1 of the year you convert, not the exact date the transfer happened.
Pull that converted money out before the timer runs out and the IRS treats it as an early withdrawal (if you're under 59½ at the time): a 10% penalty on that conversion, even though you already paid income tax on it once.
Here's the part that trips people up; once you turn 59½, this particular penalty stops applying, regardless of how recently you converted. Age 59½ is its own exception to the rule, not just a substitute for waiting out the clock.
It starts only once, with your very first Roth IRA contribution or conversion. Any growth in the account comes out tax-free once that single clock has run five tax years and you're 59½ or older, or you qualify for a specific exception, like a first home purchase.
A 45-year-old who's had a Roth IRA for a decade doesn't have to wait five more years on a new conversion for earnings purposes. That clock already cleared long ago. But the 10% penalty clock on that specific conversion's principal still resets fresh, every time.
A standard workplace 401(k) usually limits you to a short menu of mutual funds. Once your money is in a self-directed IRA, that menu opens up considerably.
A multi-asset IRA holds both equities and crypto under one tax-advantaged account, which means you're not juggling separate logins, custodians or tax filings for each type of asset.
The Crypto.com platform is one prime example; eligible users can open an IRA account and get exposed to more than 400 cryptocurrencies and 12,000 US stocks and ETFs within Traditional or Roth IRA setups.
Depending on the tier, Crypto.com's Level Up program can also offer an uncapped 1% match, paid directly in cash, on eligible rollover contributions.
Level Up rewards and availability are subject to terms and conditions and jurisdiction. Certain rewards and benefits are available only in eligible markets and may vary by region. See https://crypto.com/us/levelup for details.
Can I convert a 401(k) to a Roth IRA while still employed?
Sometimes. It depends on whether your specific plan permits an "in-service" rollover before you separate from your employer. Check directly with your plan administrator, since this varies significantly by employer.
Is there an income limit for converting a 401(k) to a Roth IRA?
No. Unlike direct Roth IRA contributions, which phase out at higher incomes, there's no income cap on conversions. Annual contribution limits still apply separately to any direct contributions you make.
How much tax will I pay on a 401(k) to Roth IRA conversion?
The converted amount is taxed as ordinary income, at whatever your marginal tax rate is for that year. There's no flat or discounted conversion rate — it's added on top of your other income.
Can I spread tax payments over multiple years for a Roth conversion?
No. Tax on a conversion is due in full for the year the distribution happens. What you can do is spread the conversion itself across multiple years, converting smaller amounts each year to manage your bracket.
What happens if I miss the 60-day indirect rollover deadline?
The full distribution becomes taxable income for that year, and if you're under 59½, it may also trigger a ten percent early withdrawal penalty on top of the regular tax.
Does a 401(k) conversion count toward my annual IRA contribution limit?
No. Rollover conversions are separate from annual contributions and don't reduce how much you're still allowed to contribute directly that year.
What happens to my employer match during a 401(k) rollover?
Any portion of your employer match that's fully vested rolls over along with the rest of your balance. Unvested employer contributions are typically forfeited once you separate from the plan, so it's worth confirming your vesting schedule first.
Do I have to convert my entire 401(k) balance at once?
No. Partial conversions are allowed, and converting in smaller pieces over several years is a common way to avoid pushing your entire balance into a higher tax bracket at once.
Important information: This is informational content sponsored by Crypto.com and should not be considered as investment advice.
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FCUL is a subsidiary of Crypto.com. FCUL is a separate entity from Crypto.com, Foris DAX, Inc., and other affiliated Foris companies. FCUL does not engage in the sale, transfer or custody of crypto currencies or digital assets. Crypto.com is a separate entity from FCUL and does not engage in the securities business. Customer balances and crypto holdings held and transacted at Crypto.com and other entities outside of FCUL are not covered by SIPC insurance and are separate from securities transactions and holdings at FCUL.
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Level Up rewards and availability are subject to terms and conditions and jurisdiction. Certain rewards and benefits are available only in eligible markets and may vary by region. See https://crypto.com/us/levelup for details.
