I Have $640k in a 401(k). How Do I Avoid Paying Taxes When Converting to a Roth IRA?

Converting a 401(k) to a Roth IRA can provide valuable long-term benefits, but you must plan for the bigger tax bill. You cannot avoid taxes on a Roth conversion. However, you can reduce the burden through strategies like gradual conversions and timing adjustments.

A financial advisor can help you decide whether a Roth conversion is right for you based on your long-term financial goals.

Roth Conversion Mechanics

When converting savings from a traditional IRA or 401(k) to a Roth IRA, income tax is due on the converted amount. This is because the money was originally contributed pre-tax. These conversion taxes are unavoidable, so there’s no way to completely get around paying income taxes on a Roth conversion.

Roth conversions are taxed as ordinary income. This means that a large Roth conversion can trigger a large tax payment in the year of the conversion.

Despite the potential for a significant tax bill, the benefit of tax-free growth going forward may make it worthwhile. Depending on an investor’s time horizon and income sources, the upfront tax hit may pay off over the long term. 

Tax Strategies for Roth Conversions

How you execute your Roth conversion can impact the taxes you pay.

One way to reduce conversion taxes is through a partial Roth conversion over multiple years rather than all at once. By gradually converting smaller chunks, taxpayers may avoid falling into higher marginal income tax brackets. Spreading a $640,000 conversion over four years, for example, may help utilize more space under lower tax brackets.

Another conversion tax strategy is to defer your conversions to years when you have lower income from other sources. As with the gradual conversion strategy, this can keep your income from rising into higher tax brackets. This, in turn, potentially limits your tax liability.

Timing is also a key factor in another approach, but this one doesn’t look specifically at your income. Instead, it aims to convert pre-tax balances during market downturns. As account values decline, you can move more of your 401(k) into a Roth IRA without the larger tax bill. 

401(k)-to-Roth Conversion in Action

Imagine you’re a 60-year-old single filer with $640,000 in a 401(k). Your annual income places you in the 24% federal tax bracket in 2026. Converting the entire 401(k) this year would add $640,000 to your income. This could push you into the top 37% bracket on every dollar of income over $640,600.

Instead, let’s consider a gradual conversion of just $128,000 of your 401(k) annually over five years. Every dollar over $201,775 will fall into the next-highest bracket of 32%, helping you avoid the 35% and 37% brackets. However, keep in mind that actual results will vary based on annual tax bracket changes and state-level taxes.

Now, what if you convert your 401(k) in a year when the market is down 10%? The $640,000 balance might decline an equivalent amount, falling to $576,000. Combined with the other income in this example, which put them in the 24% bracket, this decline could push them into the 37% bracket instead, though taxes on the converted amount would still decline quite a bit compared to converting the full $640,000 at its higher value.

Key Eligibility Rules for 401(k)-to-Roth Conversions

Eligibility rules determine when and how 401(k) savings can move into a Roth IRA. Workplace plans set their own guidelines, so the first step is understanding whether the plan allows in-service withdrawals. Some plans permit active employees to move a portion of their balance to an IRA while still working. Others restrict any movement until employment ends. These rules govern when a conversion can take place.

Separately, some employers offer a Roth 401(k) option alongside the traditional one, and their plans may allow an in-plan Roth conversion, sometimes called an in-plan Roth rollover, that lets you convert traditional 401(k) funds directly into the Roth 401(k) within the same plan, without needing to leave your job or move the money to an IRA first. This isn’t universal either, plan administrators have to specifically permit it, so it’s worth checking with your plan alongside the in-service withdrawal rules.

There is no income ceiling for converting pre-tax savings to a Roth IRA. Anyone with a traditional IRA or 401(k) balance can complete a conversion regardless of their earnings for the year. This is different from Roth IRA contribution rules, which do impose income limits. Because of that difference, conversions remain available to high earners even when direct Roth contributions aren’t.

The tax treatment depends on the type of funds held in the 401(k). Pre-tax contributions, employer matches and rollover dollars are taxable when converted.

After-tax contributions can also be converted, but only the earnings on those contributions are subject to tax. This distinction shapes how much of the conversion will be taxable and can influence decisions about timing or size.

Converted dollars become subject to Roth IRA distribution rules. Each conversion starts a separate five-year clock that must run before that converted amount can be withdrawn without penalty. ¹ Under age 59½, withdrawing converted principal before the five-year clock is up can trigger the 10% early withdrawal penalty. Separately, any earnings on the account can be taxed if withdrawn before the five-year mark, regardless of age, since the account itself hasn’t met the holding period required for a qualified distribution.

Making the Call

Converting a 401(k) to a Roth IRA may not always be the right move.

Before converting, consider your own retirement planning. This can help you anticipate whether decades of future Roth growth could outweigh the conversion taxes owed now.

Generally speaking, those nearing retirement may not benefit as much as someone who converted earlier in their career when they were in a lower tax bracket. It’s also key to work out projections with a financial advisor. They can help you map out various partial conversion scenarios.

This analysis can reveal the optimal pace and conversion amounts each year to maximize outcomes.

Whether you’re prioritizing a Roth or traditional account, long-term outcomes matter. Use our retirement calculator below to estimate how your strategy could play out over time.

What a Roth Conversion Can Cost You Beyond Income Taxes

The income tax bracket impact of a Roth conversion receives the most attention, but it’s not the only cost.

The added income from a conversion can trigger a chain of secondary tax consequences that catch many people off guard. Factoring these in before you convert gives you a more accurate picture of what the conversion will actually cost.

Medicare Premiums

Medicare sets your Part B and Part D premiums based on your modified adjusted gross income (MAGI) two years prior.

A large conversion in 2026, for example, could push you above an IRMAA threshold, increasing your monthly premiums throughout 2028. The surcharges are tiered and can add several hundred dollars per month per person. If you’re converting in your early 60s and plan to start Medicare at 65, the timing of each conversion relative to your enrollment year matters.

You can appeal the surcharge with Social Security if the spike in income was a one-time event. However, the process isn’t automatic and requires documentation.

Social Security Taxation

If you’re already collecting Social Security, a Roth conversion can make more of your benefits taxable. Up to 85% of Social Security benefits are subject to federal income tax once your combined income crosses certain thresholds.

The conversion amount counts as income in that calculation. Someone who normally pays little or no tax on their Social Security could have significantly more of their Social Security taxed in a conversion year.

For retirees in their 60s who are collecting benefits and converting simultaneously, this is an easy cost to overlook.

Net Investment Income Tax

The 3.8% Net Investment Income Tax (NIIT) is another consideration. This applies when your modified adjusted gross income (MAGI) exceeds $200,000 for single filers or $250,000 for married couples filing jointly.

The conversion amount itself isn’t classified as net investment income, but it does count toward your MAGI. That means a conversion can push you above the NIIT threshold. This can cause other income you already have to become subject to the surtax for the first time. This can potentially affect your dividends, capital gains and rental income.

You’re not paying 3.8% on the conversion itself, but the conversion is the reason you pay it on everything else.

ACA Health Insurance Subsidies

This one hits early retirees especially hard, and it matters more now than it used to, since enhanced subsidies from recent years have lapsed and premium tax credits are generally lower and more limited than they’ve been in the past few years, making every dollar of MAGI count for more.

If you retired before 65 and buy health insurance through the Marketplace, your premium tax credits are based on MAGI.

A Roth conversion that pushes your MAGI above the subsidy cliff could cost thousands of dollars in lost healthcare subsidies. In some cases, the lost subsidies can outweigh the tax benefit of the conversion entirely.

This is an especially important calculation for anyone in the 60-to-64 age range who relies on Marketplace coverage.

Loss of Credits and Deductions

Several tax benefits phase out as income rises.

A conversion that increases your adjusted gross income (AGI) could reduce or eliminate several credits and benefits, including these.

• Education tax credits
• Retirement savings contributions credit
• Deductibility of student loan interest

These may not apply to every retiree. Consider those paying for a grandchild’s education or still carrying their own student debt. In these situations, the lost benefits add to the true cost of the conversion.

State Income Taxes

Most states also tax Roth conversions as ordinary income.

A $128,000 conversion in a high-tax state could add $8,000 to $14,000 in state taxes on top of the federal bill. States with no income tax, like Florida and Texas, make conversions cheaper overall. For retirees considering relocation, converting before or after a move to a lower-tax state can significantly alter the total cost.

All of these factors work together. A conversion can quickly become more expensive once you add Medicare surcharges, higher Social Security taxes, NIIT exposure, lost subsidies and state taxes to the equation.

Be sure to run the full tax calculation before each annual conversion. This helps eliminate surprises so you can maximize this strategy and benefit over time.

Where the Money to Pay the Tax Comes From Changes the Math

Most of the conversation around Roth conversions focuses on how to reduce the tax bill. But where you pull the money to cover that bill can matter just as much as the size of the bill itself.

You have two basic options. You can pay the conversion tax out of the funds being converted, which means less money lands in the Roth. Or you can pay the tax from a separate source, like a taxable brokerage account, a savings account or current-year cash flow, and let the full converted amount go into the Roth untouched.

The difference between these two approaches can compound over time and may meaningfully change the long-term value of the conversion.

Say you convert $128,000 from your 401(k) to a Roth IRA and your effective tax rate on that conversion is 24%. The tax bill would be roughly $30,700. If you withhold that amount from the conversion itself, only about $97,300 goes into the Roth. The $30,700 that went to the IRS won’t have the chance to grow tax-free. At a hypothetical 7% average annual return over 20 years, that missing piece could have grown to roughly $119,000 in tax-free money your Roth would otherwise never have.

If instead you cover the $30,700 from a taxable brokerage account and send the full $128,000 into the Roth, every dollar gets the benefit of decades of potential tax-free compounding. The money used to pay the tax was sitting in an account where future gains would likely have been taxed anyway, so you’re essentially exchanging a taxable dollar for a tax-free one, a trade that may become more valuable the longer the Roth has to grow.

There’s a second reason to be cautious about paying the tax from the conversion itself. If you’re under 59½ and you withhold money from a retirement account to cover taxes, the IRS may treat that withheld portion as an early distribution, which could trigger a 10% early withdrawal penalty on top of the income tax already owed, making the conversion considerably more expensive than intended.

For people over 59½, the early withdrawal penalty generally isn’t a concern, but the compounding consideration still applies. Money kept inside the Roth has the potential to grow and eventually come out tax-free, while money withdrawn to pay taxes no longer has that opportunity.

Before each annual conversion, it may help to assess whether you have enough cash or taxable assets outside your retirement accounts to cover the estimated tax. If you do, paying from those funds may produce a better long-term result. If you don’t have outside funds available, you may want to consider converting a smaller amount so the tax bill stays manageable without drawing down the Roth balance before it has a chance to grow.

This is one of the few variables in a Roth conversion that may be within your control. Bracket management depends on income you may not be able to adjust, and market timing depends on conditions that can’t be predicted. But where the tax payment comes from is generally a choice you can make, and approaching it deliberately could add meaningfully to your Roth’s value over the course of retirement.

Bottom Line

Converting a 401(k) to a Roth IRA triggers unavoidable taxes, but spacing out partial conversions may reduce the burden. Converting during market downturns or in years when income is down may also help lower the overall tax bill. Generally speaking, weighing time horizons and projecting tax bracket impacts can inform conversion decisions. A financial advisor can provide insights on how to best manage your retirement accounts.

Retirement Planning Tips

• A financial advisor can help build a long-term retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. Schedule a free introductory call with your advisor matches to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, begin now.
• Use SmartAsset’s retirement calculator to estimate how much money you could have by the time you retire. The tool also shows you how much you may want to save every month to support your lifestyle in retirement.

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