Rolling Over a 401(k) to a Roth IRA: Pros and Cons

27 November 2025

Planning for retirement is one of the biggest financial decisions you'll ever make. If you've got a 401(k) from a previous employer, you might be wondering whether rolling it over into a Roth IRA is the right move. Well, it's not a one-size-fits-all answer—it depends on your financial situation, tax strategy, and long-term goals.

In this guide, we'll break down the pros and cons of rolling over a 401(k) to a Roth IRA so you can decide if it's the right move for you.

What Is a 401(k) Rollover?

A 401(k) rollover happens when you transfer your retirement savings from a 401(k) plan to another retirement account, like an IRA. You can either roll it into a traditional IRA (tax-deferred) or a Roth IRA (taxed upfront but grows tax-free).

When you roll over a traditional 401(k) to a Roth IRA, you’ll owe taxes on the amount transferred, but you’ll gain tax-free withdrawals in retirement. Sound like a good deal? Let’s weigh the pros and cons before making the leap.

Pros of Rolling Over a 401(k) to a Roth IRA

1. Tax-Free Withdrawals in Retirement

One of the biggest perks of a Roth IRA is that your withdrawals in retirement are completely tax-free. Unlike a traditional IRA or 401(k), you won’t owe taxes on withdrawals as long as you meet the requirements (age 59½ and the account being at least five years old).

2. No Required Minimum Distributions (RMDs)

Traditional 401(k)s and IRAs require you to start taking distributions at age 73, whether you need the money or not. Roth IRAs? Nope! You can let your money sit and grow as long as you want. This is a huge advantage if you want to pass on your savings to heirs or keep growing wealth well into retirement.

3. More Investment Choices

Employer-sponsored 401(k) plans often have limited investment options. By rolling over into a Roth IRA, you open the door to a much wider range of investment choices, including stocks, bonds, mutual funds, ETFs, and alternative investments.

4. Tax Diversification

Retirement planning is all about strategy. By moving some of your money into a Roth IRA, you create a mix of taxable (401(k)/traditional IRA) and tax-free (Roth IRA) income sources. This can be a game-changer when it comes to managing taxes in retirement.

5. Better Flexibility for Heirs

If you plan on leaving money to your loved ones, a Roth IRA is a better inheritance tool. Unlike a traditional 401(k), heirs can inherit a Roth IRA and withdraw money tax-free (as long as they follow IRS distribution rules).

Cons of Rolling Over a 401(k) to a Roth IRA

1. You’ll Owe Taxes on the Rollover

This is the biggest drawback. Since 401(k)s are funded with pre-tax dollars, rolling them over into a Roth IRA means paying taxes on the transferred amount. If you have a large balance, this could mean a hefty tax bill in the year you make the rollover.

2. Rollover Might Push You Into a Higher Tax Bracket

Because the rollover amount is considered taxable income, it could increase your taxable income for the year, potentially pushing you into a higher tax bracket. If you’re close to a bracket threshold, this could mean paying more in taxes than expected.

3. Immediate Cash Flow Impact

Paying taxes on a 401(k) rollover means you’ll need to come up with the money to cover the tax bill. If you don’t have extra cash on hand (or have to dip into the retirement savings itself), the benefits of the rollover might not be worth the immediate costs.

4. The Five-Year Rule for Tax-Free Withdrawals

Roth IRAs have a five-year rule—you must wait at least five years after opening the account before you can withdraw earnings tax-free. If you roll over money and need to withdraw it sooner, you could owe taxes and penalties.

5. State Tax Considerations

Some states don’t tax 401(k) distributions but do tax Roth IRA conversions. Before making a move, check how your state treats Roth IRA rollovers to avoid any state-level tax surprises.

When Does a 401(k) to Roth IRA Rollover Make Sense?

Rolling over a 401(k) to a Roth IRA isn’t for everyone, but here are a few situations where it makes sense:

- You expect to be in a higher tax bracket in retirement. If your income is lower now than it will be later, paying taxes now and locking in tax-free withdrawals later could be a smart move.
- You have cash available to cover the taxes. If you can pay the taxes without dipping into your retirement savings, it’s a more viable option.
- You want to avoid required minimum distributions (RMDs). If you prefer to keep your money invested and growing for as long as possible, a Roth IRA gives you that flexibility.
- You have a long time before retirement. The younger you are, the more time your money has to grow tax-free, making the Roth IRA conversion more beneficial.

When Should You Avoid the Rollover?

While a Roth IRA rollover can be a strategic move, it’s not always the right choice. Here are some signs you might want to hold off:

- You’re in a high tax bracket now. The added taxable income from the conversion could push you into an even higher bracket, making the tax hit too costly.
- You don’t have extra cash to pay the taxes. If you have to pull from your retirement savings to pay the tax bill, reconsider the rollover.
- You may need the money in the near future. The five-year rule means you must wait before taking tax-free withdrawals, so if you’ll need the funds sooner, you might want to keep them in a traditional account.
- You live in a state with high income taxes on Roth conversions. Some states tax Roth conversions more aggressively than others—check before making a move.

How to Roll Over a 401(k) to a Roth IRA

If you decide that rolling over your 401(k) to a Roth IRA is the right choice, here’s how to do it:

1. Open a Roth IRA. If you don’t already have one, choose a brokerage that offers Roth IRA accounts.
2. Contact Your 401(k) Plan Administrator. Ask them about the process for rolling over your funds to a Roth IRA.
3. Request a Direct Rollover. This ensures your money moves directly from your 401(k) to your Roth IRA without triggering an early withdrawal penalty.
4. Set Aside Money for Taxes. Since the rollover is taxable, be prepared to cover the tax bill without dipping into your retirement savings.
5. Invest Your Funds. Once the money is in your Roth IRA, choose investments that align with your retirement goals.

Final Thoughts

Rolling over a 401(k) to a Roth IRA has some serious benefits, like tax-free withdrawals and no RMDs, but it also comes with upfront tax costs. The decision should be based on your current financial situation, future tax expectations, and retirement plan. If you’re unsure, consider talking to a financial advisor to see if it makes sense for you.

Would you rather pay taxes now and enjoy tax-free withdrawals later, or defer the taxes and deal with them in retirement? That’s the big question. Answer it wisely!