Should You Convert a Traditional 401(k) into a Roth 401(k)?

You may be able to convert your traditional 401(k) into a Roth 401(k) if your employer offers both types of plans. It boils down to when you want to pay taxes on your retirement savings: while you are working or when you are retired. According to research from Vanguard, about 82% of its retirement plans offered Roth 401(k)s. Yet, the adoption of Roth 401(k)s has been relatively low, at 17% in 2023.

“But the participation rate has steadily increased from 11% in 2018,” noted Saïd Israilov, a CFP and a fiduciary financial advisor. “This slow but steady adoption over recent years indicates rising awareness and interest in tax-diversified retirement strategies.”

You may also convert an existing traditional 401(k) into a Roth 401(k). This could be a good option, depending on your financial situation and goals. Yet the ability to make this move depends on several factors, such as age, cash available to pay current taxes and expectations of future tax rates. Given that a conversion is a major financial decision, you should seek the assistance of a qualified financial planner or tax advisor.

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Traditional 401(k) vs. Roth 401(k)

Both traditional and Roth 401(k) are funded by your contributions through payroll deductions. The contribution limits are the same for both types of 401(k) plans, which include the following changes for 2024 and 2025. 

Both types of 401(k) plans typically offer a range of investment choices, including mutual funds and exchange-traded funds (ETFs). Many also permit participants to borrow against their account balance, subject to specific plan rules and IRS regulations. Popular choices include target-date funds, which tailor investment risk to when you want to retire. Sometimes, these funds are offered as collective investment trusts, which may have lower fees but less transparency.

Then what about the differences? With a traditional 401(k), your contributions are made on a pre-tax basis. This means contributions are deducted from your gross income, reducing your taxable income. However, withdrawals are taxed as ordinary income.  This means you'll pay taxes on both the original contributions and any growth.

On the other hand, contributions to a Roth 401(k) are made with after-tax dollars — that is, you do not get a reduction in taxable income. Instead, the advantage is when you retire. Your qualified withdrawals are tax-free. This holds true so long as the account has been open for at least five years and you’re over 59½. 

There is another difference: If you have an employer match for your Roth 401(k), the distributions will be subject to tax.  

The conversion process

The process of converting your traditional 401(k) into a Roth 401(k) is called an “in-plan Roth conversion.”  This can be done with 403(b) and 457(b) plans as well.

You must verify that a plan offers conversions. You can do this by reviewing the plan documents or contacting the plan administrator.

Next, you’ll need to see which assets are eligible for the conversion.  Some are prohibited, such as:  

• Hardship distributions
• Required Minimum Distributions (RMDs), which is when you need to withdraw money from your retirement account when you reach age 73.
• Excess contributions and excess deferrals
• Dividends from employer securities

The pros and cons of conversions

When you make a conversion, the assets of your 401(k) will be added as taxable income for the year of the conversion. This can significantly increase your tax liability. “You want to make sure you have enough cash to cover your taxes,” said Natasha Howe, who is a wealth manager and vice president at Siebert Financial.

When making a conversion, a key consideration is the future impact of tax rates. “It can make sense when your income is relatively low and you anticipate being in a higher tax bracket in retirement,” said Jonathan Thomas, a CFP and a private wealth advisor at LVW Advisors.

Let’s take an example. Suppose you have $200,000 in your traditional 401(k) and are in the 24% tax bracket. But you expect the rate to be 32% when you retire.  

With a conversion to a Roth 401(k), you will owe $48,000 in taxes. The remaining amount will then grow tax-free. Suppose it reaches $400,000 when you retire. You could then withdraw the whole amount tax-free.  

But if you did not make the conversion, you would owe 32% tax on the $400,000 or $128,000.  

However, there are other potential advantages to a Roth 401(k). Consider that they are exempt from RMDs. This can mean lower costs for Medicare — such as for Part B and Part D premiums that are based on income — and how much of your Social Security benefits are taxed.  “Roth 401(k)’s can also make a better estate planning tool, due to the new rules on inherited IRAs,” said Elizabeth Schleifer, a CFP and financial adviser at D.C.-based Armstrong, Fleming & Moore.  

These are certainly complex matters. This is why it's essential to seek the help of a qualified tax or financial adviser when considering a conversion.

Read More

• The Average 401(k) Balance by Age
• You Can Be a 401(k) Millionaire. Here's How
• How to Roll Over a 401(k)
• Roth 401(k) Contribution Limits for 2025