Five Things to Consider Before Rolling Your 401(k) into a Roth IRA

The phrase 401k in big red letters with dollar bills flying all around it.

A Roth IRA is one of the most powerful tools for building tax-free income in retirement, but getting money into one, especially from a 401(k), takes some thoughtful planning.

If you've recently changed jobs, are nearing retirement or just want more control of your long-term tax picture, rolling at least some of your old 401(k) into a Roth IRA might be worth exploring.

It can come with a tax bill upfront, but for many people, the long-term benefits can far outweigh the short-term cost, especially with today's relatively low tax rates.

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Here are five things to keep in mind as you consider rolling some of your old 401(k) into a Roth IRA:

1. What kind of 401(k) do you have?

There are two main types of 401(k)s, and the kind you have will affect how a rollover to a Roth IRA is taxed.

A traditional 401(k) is funded with pre-tax dollars, which means any amount you roll into a Roth IRA will be treated as taxable income in the year you convert it.

A Roth 401(k), on the other hand, is funded with after-tax dollars. That means you can roll it into a Roth IRA without triggering additional taxes.

However, it must stay in a Roth account (you can't roll a Roth 401(k) into a traditional IRA) if you want to preserve its tax-free growth benefits.

If you're not sure which type of account you have, a quick check-in with your human resources team or plan provider can clear things up.

2. Understand the tax impact before you make a move

Rolling over your 401(k) into a Roth IRA isn't free — it comes with a tax bill. When you move pretax dollars into a Roth, you're shifting your money from tax-deferred to tax-free.

That's a powerful long-term move, but it does mean paying income taxes on the amount you convert in the year you do it.

Why would anyone choose to pay taxes now? Because in the right situations, it can pay off later. It might make sense if:

• You're in a lower tax bracket now than you expect to be in retirement
• You have extra cash to cover the tax bill, so you don't need to dip into retirement savings
• You're looking to reduce future required minimum distributions (RMDs)
• You'd like to pass tax-free assets to heirs

We often talk to people about the bigger picture. The focus is not short-term — it's about moving you closer to the kind of retirement you want.

A Roth rollover is one of those moves that requires a little short-term sacrifice for long-term gain.

3. Watch for timing issues with RMDs

If you're age 73 or older and already subject to RMDs, there's an important rule to follow: You must take your RMD before converting a traditional IRA or rolling a traditional 401(k) into a Roth IRA.

RMDs themselves cannot be converted to a Roth, and failing to take one first could lead to IRS penalties.

This rule doesn't apply to Roth 401(k)s, which aren't subject to RMDs during the owner's lifetime.

4. Roth IRAs offer more than just tax-free growth

Aside from the obvious benefit of tax-free growth and withdrawals in retirement, Roth IRAs come with unique advantages that appeal to both retirees and those focused on legacy planning.

For early retirees or those considering a career break, Roth IRAs offer flexibility. While earnings are subject to a five-year rule and the age 59½ threshold, contributions can be withdrawn at any time, tax- and penalty-free.

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Roth IRAs can also help reduce taxable income in retirement, which could lower the amount of Social Security benefits subject to tax and help keep Medicare premiums in check.

5. Consider tax-bracket management strategies

If you're thinking about rolling over a 401(k) into a Roth IRA, consider how much you convert each year to avoid jumping into a higher tax bracket.

Many savers find it advantageous to break a large rollover into smaller, incremental conversions over several years.

This technique is often called "filling the tax bracket," and it allows you to convert just enough each year to stay within your desired marginal tax rate.

Here's how it works in practice: A married couple filing jointly in 2025 can earn up to $96,950 in taxable income and stay in the 12% tax bracket. Partial conversions can help maintain lower taxes now.

The bottom line

Rolling a 401(k) into a Roth IRA isn't the right choice for everyone, but in the right circumstances, it can unlock long-term tax savings and offer valuable flexibility in retirement.

If you expect to be in a higher tax bracket later, have non-retirement assets to cover the tax bill or want to leave a tax-free legacy to your heirs, a Roth IRA rollover deserves serious consideration.

Make sure to understand the timing rules, tax implications and account types involved before making a move.

A well-timed rollover could be one of the smartest retirement decisions you make in 2025.

Investment advisory services offered through Kelly Wealth Management, a SEC-registered investment advisor. Investments involve the risk of loss. Please consult a qualified financial advisor, tax, accounting, or legal professional prior to investing.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.