How to Convert a 401(k) to a Roth IRA Without Paying Taxes

The only way to move money from a 401(k) into a Roth IRA without paying federal income tax is to roll over the after-tax contributions already sitting in the plan, keeping the pre-tax dollars separate. That is the core of how to convert a 401(k) to a Roth IRA without paying taxes: you use IRS Notice 2014-54 to split a single distribution so after-tax dollars go to a Roth IRA and pre-tax dollars go to a Traditional IRA. Pre-tax deferrals and any investment earnings cannot make the jump to a Roth without generating taxable income. The strategy has no income limit, but it only works if your 401(k) plan is designed to allow it.¹

Why Only After-Tax Contributions Convert Tax-Free

A 401(k) can hold three kinds of money: pre-tax deferrals you deducted from income, designated Roth contributions already taxed and growing in a Roth sub-account, and non-Roth after-tax contributions that were taxed when earned but grow in a traditional sub-account. Only that third category converts to a Roth IRA without a new tax bill, because the IRS has already collected income tax on those dollars.²

IRS Notice 2014-54 is what allows the split. Before that guidance, rolling out a mixed balance often forced a proportional share of pre-tax and after-tax money into each payment. Under the notice, a single direct rollover can send the pre-tax portion to a Traditional IRA and the after-tax portion to a Roth IRA, with the participant choosing where each pot lands.¹

One detail changes the arithmetic: investment growth on your after-tax contributions is pre-tax money. If your after-tax contributions earned $3,000 before you rolled them out, that $3,000 is taxable if you convert it to a Roth IRA. Sending the earnings to a Traditional IRA keeps them out of income for the year. To keep the taxable slice small, many participants roll out their after-tax sub-account frequently, sometimes within days of each payroll contribution, so little time passes for earnings to build up.²

Confirming Your Plan Allows This

Two plan features have to be in place before this route is even available:

The plan must allow non-Roth after-tax contributions beyond the standard elective deferral limit. This is a plan design choice, not an IRS requirement, and many employers do not offer it.
The plan must permit in-service withdrawals or in-service rollovers of the after-tax sub-account if you want to move the money while still working there. Without that, you have to wait until you leave the employer.

Your Summary Plan Description is the document that spells both features out. It is required to describe the sources of contributions and when participants have a right to receive distributions.³ Look for language on “after-tax contributions,” “voluntary contributions,” or “in-service withdrawals.” If the SPD is not clear, ask the plan administrator directly whether the plan permits after-tax contributions and whether those contributions can be rolled to an outside Roth IRA while you are still employed.

Plans that do not allow in-service distributions generally restrict withdrawals of elective deferrals until age 59½, separation from service, disability, or a qualifying hardship.⁴ After-tax sub-accounts sometimes have looser withdrawal rules, but that depends entirely on how the employer wrote the plan.

How to Execute the Split Rollover

Get Your Basis Figure First

Ask the plan administrator for a breakdown showing the exact dollar amount of your after-tax contributions separately from any earnings on those contributions. That number determines how much can move to the Roth IRA tax-free. Any earnings above that basis are the pre-tax slice that should go to a Traditional IRA.

You also need the receiving-account details before you file the paperwork: the account number, full legal name, and mailing or wire instructions for the Roth IRA custodian, along with the “For Benefit Of” (FBO) notation so the check is payable to the custodian and not to you. If you plan to split, have a Traditional IRA open and ready to catch the pre-tax portion.

Request a Direct Rollover With a Clear Split

On the plan’s rollover request form, select direct rollover. That routes funds straight from the 401(k) to the receiving IRA custodians. If you take a check made out to you personally, the plan is required to withhold 20% for federal taxes even when you intend to complete the rollover within 60 days.⁴

The form has to state that the after-tax portion goes to your Roth IRA and the pre-tax portion (including earnings on the after-tax contributions) goes to your Traditional IRA. If the form does not have separate lines for each destination, attach a letter of instruction that makes the split explicit and cites IRS Notice 2014-54 as the basis for the allocation.¹

Confirm the Money Landed Where It Should

Once the request is processed, the plan usually issues separate payments to each receiving custodian. Watch both accounts to verify the after-tax dollars arrived in the Roth IRA and the pre-tax dollars arrived in the Traditional IRA. Misrouting is where a tax-free rollover turns into a taxable one, so catch any error before year-end while it can still be corrected.

How to Report It on Your Return

Even a rollover that produces zero tax has to be reported. Three forms come into play.

The 401(k) provider sends Form 1099-R by January 31 of the following year. Box 1 shows the gross distribution and Box 5 reports the employee’s after-tax contributions, which is the portion already taxed.⁵ A split distribution can produce two 1099-R forms, one for each destination. A direct rollover to an eligible retirement plan uses distribution code G.

Form 8606 tracks nondeductible IRA basis, including conversions from traditional accounts to Roth IRAs.⁶ It is how you document that the converted amount was already-taxed money. Skipping it when required carries a $50 penalty, and overstating nondeductible contributions carries a $100 penalty.⁷

On Form 1040, the gross distribution goes on line 5a and the taxable portion on line 5b. If the rollover moved only after-tax dollars, line 5b for that portion should be zero. Keep the records: the IRS recommends retaining Form 8606 documentation until all distributions from your Roth IRA are complete.⁷

Mistakes That Create a Tax Bill

Letting earnings accumulate before the rollover. Growth on after-tax contributions is taxable when converted, and the longer the money sits, the bigger that taxable slice gets. If your plan allows it, set up automatic periodic rollovers of the after-tax sub-account.
Taking an indirect distribution. A check sent to you triggers 20% mandatory withholding, and you have to replace the withheld amount from your own pocket within 60 days to keep the full rollover intact.⁴
Letting pre-tax money land in the Roth IRA by mistake. If the administrator does not split the distribution properly, any pre-tax dollars that end up in the Roth become fully taxable income for the year. Verify the allocation before submission and again after the money moves.
Skipping Form 8606. Even when the taxable amount is zero, the IRS expects the form. Without it, proving in a later year which dollars were already taxed becomes harder than it needs to be.

What Does Not Block This Strategy

Direct contributions to a Roth IRA phase out at higher incomes, but conversions and rollovers do not. You can earn well above the Roth contribution phase-out range and still roll after-tax 401(k) dollars into a Roth IRA.⁸ The absence of an income ceiling is what makes this route useful to high earners locked out of direct Roth contributions.

The IRA aggregation rule, which treats all your Traditional IRAs as one pool when calculating the taxable portion of a Traditional-to-Roth conversion, does not apply here. A direct rollover from a 401(k) is governed by Notice 2014-54, and the allocation of after-tax and pre-tax amounts to different destinations is made without regard to what is sitting in your Traditional IRAs.¹ If you already hold large Traditional IRA balances that would trigger a pro-rata tax hit on a backdoor Roth from a Traditional IRA, the 401(k) route sidesteps that problem entirely.

1
Internal Revenue Service. Notice 2014-54
2
Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans
3
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – Summary Plan Description
4
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
5
Internal Revenue Service. Instructions for Forms 1099-R and 5498
6
Internal Revenue Service. About Form 8606, Nondeductible IRAs
7
Internal Revenue Service. Instructions for Form 8606
8
Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs