On a 401(k) statement, “conversion out” means money left your traditional pre-tax balance as part of a Roth conversion. A matching “conversion in” entry should appear on a Roth account, either inside the same plan or at a Roth IRA. The dollars are still yours. What changed is the tax treatment: the amount that moved counts as ordinary income for the year of the conversion, and future qualified withdrawals from the Roth side come out tax-free.
Why the Entry Showed Up
If you initiated the conversion yourself, the line item is simply the plan’s record of the transaction. If it came as a surprise, a few things could explain it. Some employers have added automatic in-plan Roth conversion features that sweep certain contributions (often after-tax amounts) into the Roth side of the plan on a schedule. It may also reflect an election you made during enrollment or a change to your contribution settings that you don’t remember toggling. Call your plan administrator and ask them to walk you through the source of the transaction and whether it repeats automatically.
Where the Money Went
A Roth conversion from a 401(k) lands in one of two places, and your statement should make clear which.
An in-plan Roth conversion moves the money to a designated Roth account inside the same 401(k). Your funds stay under the plan’s investment menu, its rules, and the federal ERISA protections that shield 401(k) assets from most creditors outside bankruptcy.
A rollover to a Roth IRA sends the money out of the 401(k) entirely, to a Roth IRA at a brokerage or custodian you choose. Investment options open up considerably, but creditor protection now depends on your state’s rules and is often narrower. In bankruptcy, IRA assets are exempt up to $1,711,975 as of April 2025.
Both paths trigger the same federal income tax on the converted amount.
The Tax Bill You Now Owe
The entire pre-tax amount converted is added to your gross income for the year of the conversion. Convert $80,000 in June, and your taxable income for that year rises by $80,000 on top of your salary and any other earnings.1Internal Revenue Service. Retirement Plans FAQs Regarding IRAs That can push some income into a higher federal bracket, though only the portion above each threshold is taxed at the higher rate.
Federal rates for 2026 range from 10% to 37%. A single filer crosses from the 24% bracket into the 32% bracket at $201,775 of taxable income; the same jump happens at $403,550 for married couples filing jointly.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 If your salary was already near a bracket boundary, even a modest conversion can push some income into the next tier.
Most states treat the conversion as taxable income the same way the federal government does. State rates on retirement distributions run from 0% in states with no income tax to over 13% in the highest. A handful of states offer partial exemptions based on age or income. Check your state’s rules so the combined bill doesn’t surprise you.
Withholding and Estimated Payments
Your paycheck withholding won’t cover a conversion this size on its own. You generally owe estimated tax payments if you’ll owe $1,000 or more in tax after subtracting withholding and credits, and missing those payments can trigger an underpayment penalty. If the conversion happened late in the year, the annualized income installment method on Form 2210 lets you show the income arrived unevenly and can reduce or eliminate the penalty.3Internal Revenue Service. Estimated Taxes
One rule to note on timing: conversions follow the calendar year. A conversion has to be completed by December 31 to count for that tax year. Unlike an IRA contribution, you can’t reach back after year-end.
Two Costs People Miss
Medicare Premium Surcharges Two Years Later
Medicare bases Part B and Part D premiums on your modified adjusted gross income from two years earlier. For 2026, a single filer whose income exceeds $109,000 (or $218,000 for joint filers) pays a monthly surcharge on top of the standard Part B premium. At the first surcharge tier, the extra cost is $81.20 per month for Part B plus $14.50 for Part D. The surcharges climb from there, reaching an additional $487.00 per month for Part B alone once income hits $500,000 for single filers.4Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
A $100,000 conversion in 2026 could translate into hundreds of dollars more per month in Medicare premiums starting in 2028.
More of Your Social Security Becomes Taxable
If you’re already collecting Social Security, a conversion can make more of those benefits taxable. The IRS uses a “combined income” formula that includes the converted amount. Once combined income exceeds $34,000 for single filers or $44,000 for joint filers, up to 85% of your Social Security benefits are subject to income tax. The upside: once the money is in the Roth account, later withdrawals from it won’t count in that formula.
The Two Five-Year Clocks
Roth accounts run two separate five-year clocks, and mixing them up is one of the more expensive mistakes after a conversion.
The first clock decides when earnings come out tax-free. Earnings qualify only if at least five taxable years have passed since your first contribution to any Roth IRA and you’ve reached age 59½ (or meet another qualifying exception such as disability or death).5Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs This clock starts once and never resets.
The second clock applies to each conversion on its own. If you withdraw the converted dollars before five years have passed and you’re under age 59½, you owe a 10% early withdrawal penalty on the taxable portion of that conversion, even though you already paid income tax on it when you converted. Once you turn 59½, that penalty no longer applies regardless of how recently the conversion happened. Several exceptions to the penalty exist before then, including disability, a first-time home purchase up to $10,000, and qualified higher education expenses.6Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
The practical read: if you’re under 59½ and might need the converted money within five years, tapping it can add another 10% on top of income tax you’ve already paid on those dollars.
How It Shows Up on Your Tax Return
Your plan administrator will issue a Form 1099-R for the distribution from the traditional balance. On your return, you report the conversion on Form 8606, which calculates the taxable and nontaxable portions.7Internal Revenue Service. Instructions for Form 8606 That split matters if any of the converted amount came from after-tax contributions. Keep the 1099-R and your conversion confirmation together with your return; mistakes here often generate IRS notices months later.
What to Do From Here
If the conversion was intentional, the immediate task is making sure the tax is covered from outside the retirement account. Every dollar pulled from the converted amount to pay the IRS is a dollar that no longer compounds tax-free, and if you’re under 59½, withholding taken from the distribution may itself be subject to the 10% penalty. With an in-plan conversion, withholding usually isn’t offered, so the cash has to come from a checking or savings account or from adjusted paycheck withholding.
If the conversion wasn’t intentional, ask the plan administrator three questions: what triggered it, whether it will recur, and how to turn off any automatic conversion feature going forward. Then get an estimate of the added tax so you can adjust withholding or send an estimated payment before the year closes. A conversion you didn’t plan for can still be manageable if you catch it early enough to keep the tax bill from becoming a penalty as well.