Traditional 401k to roth 401k conversion tax calculator

Q: How much tax will I pay if I convert my traditional IRA to a Roth?

When converting your before-tax savings, youre including the converted amount as ordinary income, but without an IRS 10% additional tax for early or pre-59 1/2 distributions (10% additional tax) on your taxes now to get the benefit of tax-free potential growth in a Roth IRA later.

If you've been diligently saving for retirement through your employer's 401(k) plan, you may be able to convert those savings into a Roth 401(k) and gain some added tax advantages.

Table of Contents Show

Key Takeaways
How to Convert to a Roth 401(k)
Should You Convert to a Roth 401(k)?
Traditional 401(k)s vs. Roth 401(k)s
What’s a traditional 401(k)?
What is a Roth 401(k)?
What are the contribution limits in 2022?
When can I take withdrawals from a traditional 401(k)?
When can I take withdrawals from a Roth 401(k)?
Can I borrow from my 401(k)?
So which is better: A Roth or a traditional 401(k)?
How are 401k conversions to Roth taxed?
How much tax will I pay if I convert my traditional IRA to a Roth?
Can you convert traditional 401k to Roth 401 K?
Does it make sense to convert 401k to Roth?

Key Takeaways

Many companies have added a Roth option to their 401(k) plans.
Traditional 401(k)s and Roth 401(k)s are taxed differently; traditional ones use pre-tax contributions and money grows tax-deferred.
A Roth uses after-tax dollars and grows tax-exempt.
If you convert to a Roth 401(k), you’ll owe taxes on the money now but enjoy tax-free withdrawals later.
The taxes owed on converting funds will depend on your tax bracket.

How to Convert to a Roth 401(k)

Here's a general overview of the process of converting your traditional 401(k) to a Roth 401(k):

Check with your employer or plan administrator to see if converting is even an option.
Calculate the tax of converting.
Set aside enough money from outside your retirement account to cover what you'll owe when you file your taxes.
Tell your employer or plan administrator that you're ready to make the conversion.
The process from here may differ from company to company, but the plan administrator should be able to provide you with the necessary forms.

Not every company allows employees to convert an existing 401(k) balance to a Roth 401(k). If you can't convert, consider making your future 401(k) contributions to a Roth account rather than a traditional one. You are allowed to have both types.

As mentioned, you'll owe income tax on the amount you convert. So after you calculate the tax cost of converting, figure out how you can set aside enough cash— from outside your retirement account—to cover it. Remember that you have until the date you file your taxes to pay the bill. For example, if you convert in January, you'll have until April of the following year to save up the money.

Don't rob your retirement account to pay the tax bill for converting. Try to save up for it or find the cash elsewhere.

Should You Convert to a Roth 401(k)?

If your company allows conversions to a Roth 401(k), you'll want to consider two factors before making a decision:

Do you think you'll be in a higher tax bracket during retirement than you are now? If so, that can be a good reason to switch to the Roth. You'll pay taxes now at a lower tax rate and enjoy tax-free income later when your tax rate is higher.
Do you have the cash to pay taxes on the conversion? You'll owe income tax on any money you convert. For example, if you move $100,000 into a Roth 401(k) and you're in the 22% tax bracket, you'll owe $22,000 in taxes. Make sure you have the cash elsewhere to cover the tax bill, rather than using money from your 401(k) to pay it. Otherwise, you'll miss out on years of compounding. And that could end up costing you a lot more than $22,000.

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

Employer-sponsored 401(k) plans are an easy, automatic tool for building toward a secure retirement. Many employers now offer two types of 401(k)s: the traditional, tax-deferred version and the newer Roth 401(k).

Of all the retirement accounts available to most investors, such as 401(k) and 403(b) plans, traditional IRAs, and Roth IRAs, the traditional 401(k) allows you to contribute the most money and get the biggest tax break right away. For 2022, the contribution limit is $20,500 if you're under age 50. If you're 50 or older, you can add an extra $6,500 catch-up contribution for a total of $26,000. In 2023, the contribution limit increases to $22,500 and the catch-up contribution raises to $7,500, for a total of $30,000.

Plus, many employers will match some or all of the money you contribute. A Roth 401(k) offers the same convenience as a traditional 401(k), along with many of the benefits of a Roth IRA. And unlike a Roth IRA, there are no income limits for participating in a Roth 401(k). So if your income is too high for a Roth IRA, you may still be able to have the 401(k) version. The contribution limits on a Roth 401(k) are the same as those for a traditional 401(k): $20,500 in 2022, with the $6,500 catch-up amount, and $22,500 in 2023, with the $7,500 catch-up contribution depending on your age.

The biggest difference between a traditional 401(k) and a Roth 401(k) involves getting a tax break. With a traditional 401(k), you can deduct your contributions, which lowers your taxable income for that year. With a Roth 401(k), you don't get an upfront tax break, but your withdrawals will be tax-free. Once you put money into a Roth, you're done paying taxes on it.

The 401(k) is a popular workplace retirement plan, with more than 60 million active participants. Named after the section of the income tax code that created it, the 401(k) allows you to make regular contributions through payroll deductions to a tax-advantaged workplace retirement plan. Your company may match your contributions.

Today’s workplace gives you two choices for saving with a 401(k) — a traditional 401(k) and a Roth 401(k).

What’s a traditional 401(k)?

A traditional 401(k) plan allows you to defer taxes on your contributions and earnings until you tap them at retirement. Your contributions lower your taxable income, which, in turn, lowers your income tax bill.

Deferring taxes on your earnings can be a powerful boost to your returns, particularly if you invest in mutual funds, many of which distribute taxable gains and interest every year. By postponing those gains, you won’t have to pay taxes on those distributions until you retire, when you may be in a lower income tax bracket.

A traditional 401(k) also makes it easier to save. Because your traditional 401(k) contribution is excluded from your taxable income, it is untapped by the tax man. For example, consider a single filer who has $50,000 in income and pays 22 percent in federal and state taxes. A 5 percent contribution to her 401(k) would be $208 a month but would reduce her paycheck by just $162.

What is a Roth 401(k)?

A Roth 401(k) plan is named for senator William Roth (R-Delaware), who created the Roth IRA in 1997. Contributions to a Roth 401(k) are not deductible; however, earnings and withdrawals from a Roth are not taxable at retirement, provided you follow the rules for taking money out. Although this might seem onerous when you are contributing, you’ll appreciate having all your distributions tax-free at retirement.

What are the contribution limits in 2022?

Contribution limits for Roth and traditional 401(k) plans are the same. You can contribute as much as $20,500 to a 401(k) plan in 2022, an increase of $1,000 from 2021. Those 50 and older will be able to add another $6,500 — the same catch-up contribution amount as 2021 — for a maximum contribution of $27,000. These limits are adjusted every year.

Your employer may contribute to your 401(k), too, and there is a limit to the combined amount you and your employer can contribute to 401(k) plans. For those age 49 and under, the limit is $61,000 in 2022, up from $58,000 in 2021. For those 50 and older, the limit is $67,500 in 2022, up from $64,500 in 2021. You can’t contribute more than your earned income in any year.

When can I take withdrawals from a traditional 401(k)?

You can make penalty-free withdrawals from a traditional 401(k) when you are age 59½ or older. You’ll owe state and federal income taxes on the amount you withdraw.

In most cases, if you withdraw before age 59½, you’ll owe a 10 percent tax penalty on your withdrawal. And you’ll still owe income taxes on the total amount you withdraw. If you were 58 years old and in the 20 percent income tax bracket, you’d owe $3,000 on a $10,000 withdrawal — $2,000 in income taxes and $1,000 for the early withdrawal penalty.

You can, in some cases, take penalty-free withdrawals before age 59½ — for unreimbursed deductible medical expenses that exceed 10 percent of your adjusted gross income, for example, or if you’re permanently and totally disabled. You may also take penalty-free early distributions for health insurance and for the purchase of a first home. You’ll still owe taxes on the withdrawals though.

You must start taking withdrawals by age 72, whether you need the money or not. Required minimum distributions (RMDs) depend on your age and the amount of money you have in tax-deferred retirement plans, including 401(k)s.

When can I take withdrawals from a Roth 401(k)?

You can take any contributions tax- and penalty-free if you are age 59½ or older and if you made your first contribution at least five years earlier. The five-year rule supersedes the age rule. If you violate either rule, your withdrawal is subject to a 10 percent tax penalty.

If you move your Roth 401(k) into a Roth IRA, the five-year clock starts ticking on the day of the rollover. Why would you roll over to a Roth IRA? Because Roth 401(k)s, unlike Roth IRAs, are also subject to RMDs at age 72.

You can withdraw your contributions tax-free at any time. After all, you’ve already paid taxes on them. However, if you take an early withdrawal, the IRS will prorate your withdrawal between your tax-deferred earnings and your contributions. Unlike a Roth IRA, you can’t just claim that your entire withdrawal is from your contributions. Suppose you withdraw $10,000 from a Roth at age 50. Of that $10,000, $7,500 was contributions and $2,500 was earnings. You’d owe taxes and penalties on the $2,500.

Can I borrow from my 401(k)?

This depends on your employer, but in most cases, you can borrow from a traditional or Roth 401(k). You can’t borrow more than the lesser of $50,000 or 50 percent of your balance, and you must repay the loan within five years. The loan can be longer if it’s for the down payment on a home. You will owe interest on the loan (payable to yourself).

The drawback: If you can’t repay the loan, it’s considered an early withdrawal; taxes and penalties will apply.

So which is better: A Roth or a traditional 401(k)?

Traditional IRAs make it easier for you to save, because you’re contributing pre-tax income. If your biggest interest is saving as much money as possible, the benefits of tax-free earnings in a traditional 401(k) are hard to beat.

If you’re a great saver, a Roth 401(k) might be better for you. Although you’ll pay taxes on your contributions, they will come out tax-free, provided you follow the rules for withdrawals at retirement. It’s nice to look at your 401(k) balance and not have to worry about how much goes to taxes and when you have to send your checks.

How are 401k conversions to Roth taxed?

Converting a Traditional 401(k) to a Roth IRA You pay no taxes on the money that you contribute or the profit that it earns until you withdraw the money, presumably after you retire. You will then owe taxes on withdrawals. 4. A Roth IRA is funded with post-tax dollars.

How much tax will I pay if I convert my traditional IRA to a Roth?

When converting your before-tax savings, you're including the converted amount as ordinary income, but without an IRS 10% additional tax for early or pre-59 1/2 distributions (10% additional tax) on your taxes now to get the benefit of tax-free potential growth in a Roth IRA later.

Can you convert traditional 401k to Roth 401 K?

Simply stated, participants can convert before-tax 401(k) plan assets to a Roth 401(k). It's done through an In-plan Roth Conversion (also known as an In-plan Roth Rollover). The same financial motivations that make the Roth 401(k) attractive are the same considerations for an In-plan Roth Conversion.

Does it make sense to convert 401k to Roth?

Converting all or part of a traditional 401(k) to a Roth 401(k) can be a savvy move for some, especially younger people or those on an upward trajectory in their career. If you believe you will be in a higher tax bracket during retirement than you are now, a conversion will likely save you money.